Govt optimistic on rupiah value

JAKARTA (JP): The latest economic reform package brokered by the International Monetary Fund (IMF) is expected to quickly strengthen the rupiah's exchange rate, according to an official document published yesterday.

The 20-point Supplementary Memorandum of Economic and Financial Policies -- worked out jointly by the government and the IMF -- does, however, predict soaring inflation and a contraction of the economy.

The rupiah's value should strengthen rapidly in the second quarter of 1998, it said. "We expect that the exchange rate will eventually stabilize below Rp 6,000 to the dollar."

Details of the package were released by Coordinating Minister of Economy, Finance and Industry Ginandjar Kartasasmita two days after the completion of the talks with the IMF.

The document, a revision to a 50-point Memorandum of Understanding signed by President Soeharto in January, culminates three weeks of intensive negotiations with the IMF, which has organized a US$43 billion rescue package for Indonesia.

While noting a continued deterioration, it hoped that the economy would begin to recover in the second half of this year.

Inflation could reach 45 percent in this calendar year, given that the consumer price index had already risen by 27 percent in the first quarter. But price increases have started to taper off, and inflation in the 1998/1999 fiscal year should slow down to between 17 and 20 percent, it said.

The economy is also predicted to contract by 5 percent in the calendar year 1998 and 4 percent in fiscal 1998/1999.

In a brief statement yesterday, Ginandjar cautioned against overoptimism on inflation and growth projections. "The degree of uncertainty in our economy remains high. These assumptions could still change."

Officials and analysts agree that restoring the rupiah's exchange rate is a crucial precondition to any recovery. The rupiah has plunged from Rp 2,400 to the dollar in July last year to Rp 17,000 in January. On Thursday, it traded at about Rp 7,800.

The government hopes to stabilize the rupiah's exchange rate by tightening its monetary policy, specifically curtailing Bank Indonesia liquidity credits to commercial banks through setting high interest rates on Bank Indonesia promissory notes (SBIs).

The latest economic reform package promises the enactment of an antimonopoly law, a new bankruptcy law, the establishment of a special bankruptcy court and the introduction of regulations for the winding up of companies, mergers and acquisitions.

It also calls for an end to the palm oil export ban, replacing it with a tax of not more than 40 percent.

It outlines a program for privatization of state enterprises and for accelerated restructuring of the battered banking sector.

The package also provides a framework to resolve the $74 billion in corporate foreign debt.

The debt issue, despite its contribution to the crisis, was not specifically addressed in the January package, a factor that led to the rupiah plunging even further in the days immediately after it was announced.

The latest reform package revised some of the assumptions used in calculating the government budget this fiscal year, which is now expected to register a deficit equal to 3.2 percent of the gross domestic product.

The package commits the government to phase out subsidies on food -- except for rice and soybeans -- and on medicines, energy and fuels. It sets an October deadline for the termination of all subsidies, except for fuels. (rei/emb)