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.