IMF approves $1b credit for Indonesia

Wed, 06 May 1998 | Source: DJ

WASHINGTON (Dow Jones): The International Monetary Fund approved Monday a US$1 billion credit to Indonesia, thereby opening the door to the release of $7 billion more in lending and bilateral aid and trade financing, a top fund official said.

With the IMF's renewed seal of approval, the Asian Development Bank and World Bank are expected to go ahead with loan consideration by their boards within a few weeks, said Stanley Fischer, the first deputy managing director, in a press conference following the IMF board approval of the outlay.

The ADB loan is for $1.5 billion, and will be available in two tranches, with the first of about $500 million, said Hubert Neiss, the IMF's top official in Jakarta. The World Bank loan is for about the same amount and will also be offered in tranches, he said.

But the IMF will continue to keep the program under intensive surveillance, Fischer said, with the next $1 billion tranches depending on positive reviews, to be completed by the board on June 4 and July 6.

Japan, Australia and Malaysia will also release some of the 'second-tier' backup financing.

Japan will provide $1 billion and Australia $300 million, while Malaysia's contribution is still unclear, Fischer said.

In a related development, IMF adviser Prabhakar Narvekar met with President Soeharto in Jakarta yesterday to convey the decision of the IMF executive board.

Narvekar quoted the President as saying he remained fully committed to the economic reforms agreed with the IMF, despite having had to make a difficult decision to raise fuel prices.

"The President said it was a very difficult decision," Narvekar told reporters in referring to the government decision to raise fuel and electricity prices as of yesterday.

He said IMF Director for Asia and the Pacific Hubert Neiss would return to Jakarta in the middle of this month to conduct the monthly review of the reform implementation.

Separately, Coordinating Minister for Economy. Finance and Industry Ginandjar Kartasasmita said the IMF aid would be used to strengthen foreign reserves and the balance of payments.

"Indonesia would get $7 billion in aid from the IMF, the World Bank, Asian Development Bank and several donor countries within the next three months," Ginandjar told reporters after a meeting with President Soeharto later yesterday.

He expected that other countries such as Singapore and Brunei would follow soon, disbursing their aid to strengthen Indonesia's international reserves.

Fischer said several other countries including the U.S. also agreed to make second-tier financing available when the bailout package was first put together last year.

But since there weren't clear criteria for releasing those funds at this stage, countries were left to make the decision for themselves, Fischer added.

Still, the board, which voted its support unanimously, called the program - in its third revision now - a "strong one" and also noted there were certain subsidies used to try to soften the economic impact of the crisis on the most vulnerable, Fischer said.

Fischer said there was "a very definite attempt to cushion the impact," on the poor.

President Soeharto has backed the program, Fischer said in response to a question.

Still, "the real test will be whether the program is implemented and how vigorously it will be implemented," he said.

Continued monitoring is one reason the credit was divided into three tranches, he said.

Strengthening the rupiah is a key part of the program, and the success of that effort, as well as for other currencies, could be affected by external factors, Fischer said.

Thailand and South Korea's initial devaluations were "excessive" relative to their economic fundamentals. Now, those currencies are "back closer to where they should be," Fischer said. That's a positive sign, but the "real restructuring has still to be done."

But the "weakness of the Japanese economy," including its financial system, is a factor that has to be watched, Fischer said. "That is something that is a worrisome factor in the region," he said, adding that he hopes to see more financial sector restructuring soon in addition to the recent stimulus package.

Besides taking steps to dismantle clove and plywood monopolies, Indonesia has also adopted a more restrictive monetary policy regime to limit easy credit to the nation's troubled banking sector and ultimately to assure a stronger rupiah.

There are certainly concerns about regional political stability surrounding IMF approval of the credit. But senior officials have stressed that the institution won't hesitate to again suspend outlays to Indonesia if program compliance becomes shoddy.

The idea of resuming IMF payments to Indonesia has prompted criticism in the U.S. Congress, where lawmakers particularly want the IMF to tie loans to improved human rights and labor laws.

Democratic lawmakers most prominently hold Indonesia up as an example of a place where some of the most egregious rights violations are now taking place. (prb)

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