IMF approves $399m loan to Indonesia

IMF approves $399m loan to Indonesia

WASHINGTON (Reuters): The International Monetary Fund approved a US$399 million payment from its loan to Indonesia on Thursday and said economic reforms were at "a crucial stage."

First Deputy Managing Director Stanley Fischer said growth in Indonesian gross domestic product was likely to reach the government's target of 3-4 percent this year. But doubts about the government's commitment to reform meant market sentiment remained fragile.

"The emerging recovery could quickly stall if market confidence does not take root," he said.

The IMF approved $12 billion in loans to Indonesia during the world economic crisis of 1997-99, paid out some $10 billion and then topped that loan up and transformed it into a $5 billion 3- year credit.

But payments were frequently delayed amid political upheaval and doubts about the government's ability to follow through on its reform program.

In November 1997, the IMF had put together a $43 billion international rescue package for Indonesia as the crash of its currency the rupiah exposed a fragile economy and a flimsy financial system.

In its latest loan approval IMF directors warned that, given a recent large increase in government debt, the process of fiscal consolidation should begin with the 2001 budget.

"Asset recovery and debt restructuring are the core structural challenges for sustaining growth over the medium term," Fischer said, recommending that Indonesia take "comprehensive legal action" against its non-cooperative debtors.

Fischer further warned that while the Indonesia has taken many steps to strengthen its banking system, more needs to be done.

"Many Indonesian banks still face major challenges in implementing financial and operational restructuring," he said.

Fischer called for more vigorous bank restructuring and a commitment to improved management, which he said would require intensive vigilance by the Bank of Indonesia and Ministry of Finance.

"Ultimately, the best guarantor of bank governance and profitability is likely to be the accelerated privatization of state banks combined with strengthened supervision," he said.