Indonesia and IMF agree on reform package

Indonesia and IMF agree on reform package

JAKARTA (JP): The following is the full text of the government
press release on the reform package agreed upon by the Indonesian
government and IMF after two weeks of negotiations:

The impact of an ongoing monetary crisis since July 1997 has
been reflected in the drastic depreciation of the Southeast Asian
currencies. This excessive depreciation could lead to an
economic crises if not handled in a firm an timely manner. The
currency turmoil has spread throughout East Asia, and last week
we witnessed a drastic drop in stock market indexes in the United
States, Europe, Latin America, East Asia and Australia. This is
an indication that the volatility in financial markets and in
capital markets has become a global phenomenon.

To minimize the negative impact of this volatility and
uncertainty, the Indonesian government has taken a number of
steps aimed at improving national efficiency, economic endurance
and global competitiveness. Those steps include:
1. Adjustment of government expenditures so that the state
budget can, at a minimum, be maintained in a position of balance.
2. Adjustment of interest rates and liquidity so as to stabilize
the exchange rate. This is deemed necessary considering that the
rupiah exchange rate has been floated and that monetary crises
have been experienced throughout South East Asia.
3. Postponement and Review of government projects, state-owned
enterprise projects, and private projects related to the
government/state-owned enterprises, which was intended primarily
to reduce the current account deficit in the balance of payments.
4. Various efforts to boost exports and to provide incentives to
exporters to sell their foreign currency.
5. A gradual reduction of interest rates and a loosening of
liquidity designed to stimulate the economy, including small and
medium scale business and cooperatives.

The above steps were implemented as a result of the limited
cabinet meeting on Sept. 3, 1997, the government statement to the
plenary session of the Indonesian parliament on Sept. 16, 1997,
and the decision of the cabinet meeting on Oct. 8, 1997. These
steps were taken to increase the confidence of the international
community in Indonesia. The government is optimist that market
confidence can be restored in light of the fact that the
fundamentals of the Indonesian economy are in general sound.

Although various programs and adjustment measures have been
introduced by the government, nevertheless, as a member of
certain international agencies including the International
Monetary Funds (IMF), the World Bank and the Asian Development
Bank (ADB), Indonesia frequently consults with these agencies.

Considering the international experience of the IMF, the World
Bank and the ADB, and given that Indonesia is in need of
technical assistance, the government has invited these agencies
to review the various programs that have been, and will be,
implemented by the government, so as to improve upon these
programs. The IMF team, the World Bank and the ADB have been
engaged in this review process since Oct. 17, 1997.

Programs have been formulated to cover actions in several
areas, including:

a. efforts to restore the health of the financial sector

b. Fiscal policy

c. Monetary policy including exchange rate policy

d. Structural adjustment, in the form of an extension and
deepening of the deregulation program

Considering the very broad scope of the program and the fact
that it covers a number of economic aspects, the program can only
be implemented over a three-year period. In its implementation,
it will b monitored tightly and will involve necessary reviews,
and for that reason Indonesia will be assisted by experts from
the IMF, the World Bank and the ADB.

Financial

The restoration of the health of the financial sector
includes:

a. Banks, including private banks, government banks, and regional

development banks

b. Financial institutions

c. Insurance and pension funds

d. Capital market institutions such as mutual funds and
securities houses

The program in the fiscal sector is basically aimed at
increasing government revenue and reducing expenditure, and will
be followed by an improvement of budget discipline so that during
the 1997/1998 fiscal year we will, at a minimum, succeed in
avoiding a budget deficit. For the 1998/1999 fiscal year and the
years thereafter, we are targeting a budget surplus of 1 percent
Gross Domestic Products (GDP). The increase in government
revenue will be achieved through strict discipline in non-tax
government revenue, in compliance with the law already ratified
by the parliament. Moreover, fiscal policy will be aimed at
reducing the current account deficit in the balance of payments
so that within two years it can be reduced to less than 3 percent
of GDP.

As a result of diminished economic activity, economic growth
during the 1997/1998 and 1998/1999 fiscal years will decline, but
the growth rate is predicted to rise again to approximately 7
percent by the year 1999/2000 and the years thereafter.

The program in the monetary sector will basically continue
policies already enacted by enhancing our level of caution so
that the inflation rate can be maintained at a single digit.
Inflation will be restrained by controlling liquidity and
interest rates in order to both stimulate economic activity, on
the one hand, and stabilize the economy, on the other.

Objectives

The fundamental objective of the structural adjustment program
is to increase national efficiency and the competitiveness of the
Indonesian economy. To accomplish this objective, the steps to
be implemented, among others, include:
a. Gradual reduction of import tariffs, including those on
chemical products, iron and steel, and fishery products, to 5 to
10 percent by the year 2003. Starting on Jan. 1, 1998, import
tariffs on a large number of chemical products will be reduced by
5 percent, while tariffs on fishery products will be reduced from
10-20 percent to 5 percent. Most tariffs on iron and steel will
also be reduced starting Jan. 1, 1999.
b. Trade deregulation for various commodities, such as wheat and
wheat flour, soybeans, and garlic. Starting on Jan. 1, 1998,
these commodities can be imported freely under general importer
status. Imports of soybeans and garlic will be subject to a 20
percent tariff and imports of wheat flour will be subject to a 10
percent tariff, to be reduced to 5 to 10 percent by the year
2003. To protect consumers, the government will temporarily
provide a subsidy for wheat flour. Moreover, the administrative
retail price of cement will be eliminated in the near future.
c. Reduction of obstacles hindering exports, including export
taxes, to be implemented in stages.
d. In line with government commitments to the World Trade
Organization (WTO), the local content program for automobiles,
which provides special tariffs for automobile producers who
achieve high local content, will be eliminated by the year 2000.
With reference to the national car project, the government has
agreed to implement the decision of the WTO.
e. In order to improve the efficiency of the state budget, the
government will review investment and expenditure by the public
sector, including government expenditure for state-owned
enterprises and strategic industries. Meanwhile, the
privatization will be continued, and will include the state-owned
banks once merger of these banks is finalized.

All of these programs will be presented by the managing
director of the IMF to the executive board, since they relate to
the financial assistance from the IMF.

To support the implementation of the program, the
aforementioned international agencies, together with a number of
countries, have stated their intention to provide financial
assistance, the amount and term of which have yet to be
determined. The amount of financial assistance will be announced
by each individual international agency and by each individual
country.

The government firmly believes that these policies and
programs will be effective in restoring the health of the
Indonesian economy so as to improve the welfare of the people and
alleviate poverty.