IMF urges Indonesia to ensure recovery does not falter
IMF urges Indonesia to ensure recovery does not falter
WASHINGTON (Agencies): Indonesia must dispel political uncertainty and intensify reforms if economic recovery is to take hold, the International Monetary Fund (IMF) said on Monday.
"There are many risks in the near term, and achievement of (economic) objectives is predicated on swift reduction of political uncertainties and intensified program implementation," the IMF said in a press summery of its annual "Article IV" review of Indonesia.
The assessment closely tracked comments issued by the IMF on Sept. 14, when it approved a US$399 million installment from the $5.0 billion loan program signed in February.
As it did then, the IMF warned that market confidence is fragile, and the renewed volatility and weakness in financial markets threaten Indonesia's recovery.
The IMF said private capital flows have yet to recover and asset recovery and corporate debt restructuring have yet to reach a decisive stage.
The IMF said there should be room for interest rates in the country to decline from currently high levels as market sentiment and risk premiums improve.
But any reduction in interest rates would require the consistent implementation of key reforms, particularly in bank and corporate restructurings. It said that despite progress in recapitalizing state banks, more work needs to be done.
It said the government should divest the large holdings it has built up in the banking system since the crisis began.
The IMF said that a supportive fiscal stance is appropriate this year but that fiscal consolidation should start in 2001, given the government's high debt level.
Indonesia's IMF program envisions gross domestic product (GDP) growth of 3 to 4 percent for 2000, with average annual inflation also at 3 to 4 percent.
The budget deficit, targeted at 4.8 percent of GDP, should help promote recovery, while ensuring adequate protection for the poor, the IMF said.
But Indonesia should prepare for a tighter budget during 2001, given the growth in public debt, the IMF said. The IMF also urged Indonesia to move cautiously with plans to allow more local autonomy over public spending, to ensure sustainable revenues and delivery of services.
The IMF praised Indonesia for maintaining its floating exchange rate and open capital account.
The IMF reiterated its disappointment with the slow pace of corporate debt restructuring, a prerequisite to stimulating new flows of credit and investment.
"Strong political leadership is needed to change the incentive structure faced by recalcitrant debtors," the IMF said.
The IMF noted "considerable progress" in recapitalizing state banks, albeit at a substantial increase in the national debt. But state banks continue to suffer high operating costs and low earnings potential.
The IMF underlined the need for vigilance on the part of the supervisory agencies, to ensure continued financial and operational restructuring, especially of the state banks, with the help of international expertise."