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."