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)