Indonesia backs IMF plan, but risks persist

Indonesia backs IMF plan, but risks persist

WASHINGTON (Reuters): Indonesia's finance minister said here over the weekend Indonesia would stick to the terms of a loan agreement with the International Monetary Fund, learning to live without subsidies despite the pain they bring.

But Fuad Bawazier admitted political turmoil in his country of 200 million people could slow the reform package.

He said there were signs of economic stability, but it would take time to return to the rapid growth rates the once-time tiger economy had enjoyed before.

"We are going to stick to the plan right now," Bawazier told Reuters and Reuters Television in a joint interview.

Asked later about the protests -- triggered by complaints about IMF-mandates price rises for food, fuel and transport, and by increasingly vocal calls for political reforms -- he said the government had no choice but to lower subsidies.

"We have to remove the subsidy to tighten the fiscal policy. People have to realize we cannot continue keeping subsidies," he said, noting that a generation had grown up with low prices and would have to get used to the change.

Several people have been reported killed in the Indonesian rioting and the protests have unsettled financial markets and driven the rupiah currency sharply lower.

But Bawazier, appointed in a big government reshuffle in March, said he hoped the government would be able to help the rupiah through dialogue with protesters rather than by raising interest rates. He said there were no plans for a crack-down.

"I do not think we can continue raising interest rates. Maybe some other measures need to be taken as well," he said.

Asked if protest riots could slow the program, he replied: "There is a possibility of that. The focus is going to be split, at least for the time being."

The rupiah is currently trading at around 9,000 to the dollar, well below a government target of an average 6,000 rupiah per dollar rate for the year to March 1999.

The international community has just resumed payments to Indonesia after a six-week gap while the government and the IMF wrangled about the shape of the economic reform program.

The IMF approved a US$1 billion payment on Monday and the U.S. Export-Import Bank stepped in with $1 billion of export credit guarantees on Friday.

Bank Chairman James Harmon said the money would fill a gap left when the private sector stopped offering letters of credit, effectively bringing trade with Indonesia to a halt.

"We have stepped in ... to fill that gap and of course we are supporting U.S. exports by doing that. We are also providing the liquidity for Indonesia's economy to operate," he told reporters after signing the loan.

Harmon said he hoped the export guarantees could help calm the political situation. "We are hoping that by providing the funds so that Indonesia can buy goods this will bring some greater stability," he said.

Bawazier said Jakarta had also asked the United States to hand over some of the $3 billion it has promised to contribute to the so-called second line of defense of a $40 billion international rescue deal.

Australia, Japan and Malaysia have all said they would make bilateral funds available, but the United States has not yet given any indication that it plans to pay.

Indonesia's other major problem centers on some $80 billion of private sector debt and creditors opened rescheduling talks in Tokyo on Friday. Bawazier said he expected details of a deal to be made final during the talks.

"I think they are going to finalize the details. They are going to find a framework to reschedule the payments and that is going to reduce pressures on demand for foreign exchange," he said.