IMF, govt reach agreement on difficult fiscal issue

JAKARTA (JP): The International Monetary Fund told Indonesia's main international donors, who gathered here on Monday for a two- day meeting, it had reached a broad agreement with the government on resolving the country's crucial fiscal deficit problem.

"We are pleased to say that progress is being made in addressing the fiscal problem for 2001," the IMF said in a statement at the Consultative Group on Indonesia (CGI) interim meeting at the Ministry of Finance.

"The (IMF) mission has reached agreement on the broad areas where fiscal measures can be taken. However, given the size of the problem, bold initiatives are needed, and these will take some time to be fully formulated," the IMF said.

The IMF said progress was also made in other areas of the country's economic reform program, adding that it was confident the CGI donors would maintain their financial support of the country.

CGI groups Indonesia's traditional multilateral and bilateral lenders, of which the largest are the World Bank, the Asian Development Bank and Japan.

Experts said the IMF's endorsement was crucial for the country to maintain the financial support of the CGI donors.

A special mission from the IMF arrived in Jakarta early last week for a two-week review of the country's economic reform program, and to examine the latest economic conditions in the country.

The IMF and government officials said the main focus of the review was finding a resolution to the country's larger-than- projected 2001 state budget deficit.

The CGI donors pledged last October in Tokyo some US$4.8 billion to help finance the current state budget deficit. There was speculation the donors would delay the disbursement of the pledged loans if the government failed to reach an agreement with the IMF on this issue.

The interim CGI meeting is a warm-up for the group's meeting in October or November, possibly in Yogyakarta, to decide on the amount of financial support they will provide Indonesia for its 2002 state budget.

Attending the meeting on Monday were local representatives of the CGI donors, visiting IMF deputy director for the Asia Pacific Anoop Singh and senior government ministers, including Coordinating Minister for Social, Political and Security Affairs Susilo Bambang Yudhoyono, who briefed the donors on the country's current political and security conditions.

The government initially projected a state budget deficit of 3.7 percent of gross domestic product (GDP). But due to the weakening of the rupiah and rising domestic interest rates, the IMF and the government said the deficit could widen to 6 percent of GDP unless corrective measures were taken immediately.

The IMF has said such a widening of the budget deficit could not be allowed because it could further weaken market confidence given the concerns over fiscal sustainability. It also said such a massive deficit would cause serious inflationary pressure.

The government said earlier it was considering five measures to maintain the deficit at 3.7 percent of GDP. These measures included increasing tax revenue and cutting spending.

The government plans to hold immediate discussions with the House of Representatives on the revised state budget.

Coordinating Minister for the Economy Rizal Ramli told the donors the government expected the House to approve the revised budget in the middle of May.

"The IMF has agreed on the changes to the budget assumptions," Rizal later told reporters.

In the preliminary 2001 budget revisions announced over the weekend, the GDP growth forecast for 2001 was cut to between 3.25 percent and 3.75 percent from 5 percent, and the inflation forecast increased to between 9 percent and 9.5 percent from 7.2 percent.

Economic growth was 4.8 percent last year, up from zero in 1999 and a contraction of almost 14 percent at the peak of the economic crisis in 1998.

The average interest rate (the central bank benchmark rate) was revised to 15 percent from 11.5 percent, and the average rupiah exchange rate was revised to 9,600 against the dollar from 7,800.

But the government held steady on the forecast budget deficit of 3.7 percent of GDP, a target it proposes to meet by sharply increasing tax revenue and cutting expenditures.

The IMF said the special mission would return to Jakarta to sign a new agreement on reform measures following the House's approval of the budget revisions. Once this agreement is signed, the IMF will disburse its third $400 million loan tranche to the country. The tranche was scheduled to be released late last year.

The IMF statement said the new objective of the government was to deliver at least 3 percent economic growth this year, "which is still an ambitious target in light of weaknesses in the world economic outlook, and the recent slowing in non-oil exports".

The government initially projected economic growth of about 5 percent this year.

"The policy framework under consideration for the 2001 program also aims at containing 12-month inflation to the single digit range by the end of the year, and maintaining Bank Indonesia's gross foreign exchange reserves at their relatively comfortable level close to about $29 billion," the IMF said.

Minister of Finance Prijadi Praptosuhardjo said the government would accelerate the implementation of the reform program agreed to with the IMF.

"We are fully aware that we will have to live up to our side of the agreement, and therefore we are keen to keep our program with the IMF on track," Prijadi said. (rei)