Govt signs new pact with IMF

Govt signs new pact with IMF

JAKARTA (JP): The government has signed another agreement with
the International Monetary Fund (IMF), the fourth in nine months,
promising yet more reforms in a bid to arrest the country's
economic turmoil.

Success of the programs, however, hinges on additional foreign
financial assistance of between US$6 billion and $8 billion.

The latest letter of intent is far less restrictive than
previous ones, allowing the government to maintain subsidies on
food, fuel, electricity and other spending on "social safety net"
programs to help the poor cope with the crisis.

Previously, the IMF insisted these subsidies be phased out
within the year.

The agreement, signed by Coordinating Minister of Economy,
Finance and Industry Ginandjar Kartasasmita on Wednesday evening,
was announced yesterday after a meeting between IMF Asia-Pacific
Director Hubert Neiss and President B.J. Habibie at the Bina
Graha presidential office.

Neiss, who took part in the media briefing led by Ginandjar
afterwards, said the IMF-backed reform programs should "clear the
way for further international financial assistance, which at this
time Indonesia urgently needs."

The IMF executive board will decide on the disbursement of the
next $1 billion tranche in the middle of next month, Neiss said.

Indonesia has already received $4 billion since October from
the IMF, which organized a $43 billion international bailout
package to help Jakarta get its economy back on track. The Fund
is releasing its commitments in $1 billion monthly installments,
pending satisfactory progress reports from the government.

The government has revised many of its economic targets and
assumptions that it made in the previous letter of intent sent to
the IMF in April by president Soeharto's administration.

Economic and political turmoil has further crippled the
economy, making macroeconomic targets projected in April
unrealistic.

The government now predicts a 10 percent contraction of the
economy this year instead of 5 percent previously predicted.
Inflation is projected to reach 80 percent, instead of 40 percent
predicted in April, it said.

The government hopes to strengthen the rupiah's exchange rate
to 10,000 against the U.S. dollar by the last quarter of this
year. The rupiah's exchange rate hovered at the 14,500 level this
week.

In April, the government predicted the rate to strengthen to
6,000 to the dollar this year.

Ginandjar said the country's economic decline should stop once
the economic programs were implemented and confidence in the
economy returned. He said increases in the inflation rate should
slow in the coming months as well.

The government's social safety net programs will take a heavy
chunk of its budget, already significantly scaled down because of
huge projected revenue shortfalls, he said.

Social spending allocations are expected to force a budget
deficit amounting to 8.5 percent of gross domestic product.

The shortfall is to be covered by foreign financing.

Ginandjar said the government had already secured $4 billion
in foreign loans to finance the deficit, and needed between $6
billion and $8 billion more to cover the remaining gap.

"Rebuilding the economy is for the Indonesian people alone to
do. But this endeavor is difficult without help from the
international community, given the extent of the problem,"
Ginandjar said.

He said the Asian Development Bank announced in Manila
yesterday that it would extend $1.5 billion in new loans to
Indonesia. The World Bank has already pledged $1 billion and
Japan is also expected to come up with more aid next month, he
added.

Other major points in the latest programs include:

* Continuation of the tight money policy to stabilize the
rupiah exchange rate and slow the rate of inflation. The
government will maintain base money and net domestic assets --
both used as the broad measure of money supply -- at current
levels until at least the third quarter.

* Strengthening Bank Indonesia's monetary management. Central
bank promissory notes (SBIs) will be auctioned to allow the
market to set interest rates. SBIs will become Bank Indonesia's
primary instrument for open market operations.

* Actively providing support for sound banks and restructuring
the capital of troubled banks, such as selling their equity to
local and foreign investors. The government continues to
guarantee the safety of public money deposited in banks.

* Ensuring supply and distribution of basic commodities,
particularly rice, cooking oil, sugar and soybean.

* Launching more labor-intensive public works programs, and
using "food-for-work" schemes in drought-stricken areas.

* Rehabilitating and strengthening the food distribution
network.

* Subjecting Pertamina, the state electricity company (PLN)
and the State Logistics Agency (Bulog) to audits using
international standards. The government's Reforestation Fund will
also be similarly audited.

* As a temporary solution to finance international trade, Bank
Indonesia will establish in July a pre-shipment export guarantee
program to facilitate import and pre-shipment export financing
for exporters holding letters of credit.

Neiss said the programs should be widely disseminated and
explained to ensure widespread support. "Economic policies will
be effective if there is a broad consensus through the political
spectrum on measures that are needed," he said.

Ginandjar said any recovery was likely to be gradual and slow.

"If these programs can be truly and wholly implemented, then
our economy can gradually recover along with the return of public
confidence.

"The process of recovery cannot be swift due to the severity
of the economic situation. There are still tough times ahead of
us which we will have to deal with together through
perseverance," Ginandjar said. (prb/emb)