Indonesia, IMF strike new deal

Indonesia, IMF strike new deal

JAKARTA (JP): Indonesia and the International Monetary Fund
(IMF) reached an agreement yesterday on a new set of economic
reform measures, which for the first time specifically addresses
the problem of the country's huge corporate debt owed to foreign
banks.

Under the deal with the IMF, Indonesia promised to carry out
its reform commitments to the letter, a pledge widely deemed as
necessary not only to revive the economy, but more importantly,
to regain public confidence at home and abroad.

But there was some bad news in the package as spelled out by
Coordinating Minister for Economy, Finance and Industry Ginandjar
Kartasasmita at a media briefing held after a cabinet meeting at
the Bina Graha presidential office yesterday.

Interest rates will be kept high until the rupiah recovers to
a more acceptable level, and the economy, originally predicted to
have zero growth, will be projected to contract 4 percent this
year.

The government is revising its budget forecasts. It is now
predicting inflation to run at 17 percent this year instead of
the original 20 percent projection. The budget will also project
international prices of oil, which contributes a sizable portion
to government revenue, to average US$14.50 a barrel instead of
$17 per barrel.

The government's fiscal 1998/1999 budget, which began April 1,
will run a deficit of 3.2 percent, he said. This will be covered
by foreign loans and by part of the proceeds from the
privatization of 12 state companies this year, he added.

Ginandjar said the IMF had agreed to allow the government to
continue subsidizing rice and soybeans for an indefinite period.

Subsidies on other foodstuffs, drug raw materials, animal feed
and energy will remain with the condition that they be phased out
and ended by October. Fuel subsidies, however, will be exempted
from the deadline, he said.

Ginandjar acknowledged that there would be more price
increases in the coming months, including for gasoline, which
would eventually force up public transportation fares.

"Restoring the economic situation is not a simple and easy
task... In the coming days, despite the new agreement with the
IMF, we need to continue to tighten our belt."

Recovery, as reflected in the rupiah's exchange rate, interest
rates or inflation, will not occur instantly, he said. "The most
important thing is that we are heading in the direction toward an
economic improvement and recovery."

Yesterday's announcement came after three weeks of intensive
negotiations with the IMF. The deal was reached in the morning
and presented before a cabinet meeting later in the day.

President Soeharto fully agreed to it, Ginandjar said.

The government had originally expected to make the details of
the agreement public yesterday, but postponed the announcement
until today to allow for the text to be translated and to give
the IMF board in Washington a first view, Ginandjar said.

The IMF has organized a $43 billion rescue package for
Indonesia, but it is insisting on tough economic reforms.

Debt settlement

Ginandjar said a framework for a debt settlement had been
worked out, using a model used by Mexico in resolving a similar
problem in 1993.

Government participation in the debt settlement will be
limited, he said. "There's not going to be a government bailout
or a government subsidy."

The government will guarantee debtors access to foreign
currencies to repay their debts at a "reasonable" exchange rate.

The currency crisis was precipitated by debtors rushing to buy
foreign currencies late last year as concerns mounted about the
falling rupiah's value.

The debt solution required creditor banks to give a grace
period to debtors in repaying debt principals, and a longer
repayment period, Ginandjar said. "This is not a debt moratorium.
It's known as a standstill," he said.

Creditors would still have to assume the risks of the loans.
"The creditors and the government are meeting halfway," he said.

Ginandjar said this proposed framework was voluntary in nature
but that debtors and creditors who opted out of it would not be
entitled to the facility offered by the government.

He said the government was looking at a three year to four
year time frame for the debts to be settled but that the
framework still had to be negotiated between debtors and
creditors.

If the debts cannot be solved, then they will have be resolved
by law, and for this, the government is drawing up a regulation
to amend the Dutch-enacted bankruptcy law which has been deemed
ineffective to deal with the economic crisis.

While a tight monetary policy will keep interest rates high,
the government will offer credits at subsidized rates to small
and medium companies and cooperatives, Ginandjar said, adding
that the World Bank and the Asian Development Bank would
participate in the scheme.

The government plans to expand its labor-intensive projects
designed to provide jobs for the growing ranks of unemployed
rural and urban workers, he said.

The government will also accelerate its plan to privatize 12
state companies, chiefly through placement of shares in the stock
exchange. Five companies are already listed at the Jakarta Stock
Exchange and seven more will be listed this year, he said.

At the cabinet meeting yesterday, President Soeharto ordered
Minister of Home Affairs R. Hartono to eliminate all business
levies charged by local administrations at provincial and city
levels. "The minister was asked to not let this ever happen
again," Ginandjar said quoting the President.

Local government revenues will be bolstered by a new 5 percent
gasoline tax, higher tax rates on property sales and the fact
that all property tax revenues will be allocated entirely to
local governments, he said.

Bank Indonesia Governor Sjahril Sabirin said the government
would continue to use the free floating exchange rate system for
the rupiah, although it was currently studying various
alternative systems.

"We hope that through the current system and with the support
of the IMF, we can restore public confidence and the rupiah will
gradually strengthen," Sjahril said.

One system not discussed in the negotiations was the currency
board system (CBS), which would peg the rupiah to a foreign
currency at a fixed exchange rate. The government had looked into
the concept over the last two months, a move that sparked
controversy with the IMF.

"A CBS is not in the picture. It's on the back burner,"
Ginandjar said in reply to a reporter's question.

This is the third agreement that Indonesia has signed with the
IMF since October. The first two failed to resuscitate the
economy, with the rupiah continuing its free fall, from Rp 2,450
to the dollar in July, to Rp 17,000 in January. Yesterday, the
rupiah was trading between Rp 8,000 and Rp 9,000.

The first agreement suffered when Indonesia wavered on its
reform plans, while the second started badly after its
announcement in January for failing to address the corporate debt
problem.

The January letter of intent was signed by Soeharto himself.

Ginandjar said he had been assigned to sign the latest
agreement, expected for later yesterday.

Ginandjar denied that the agreement was a correction to the
previous two signed with the IMF. "This is not a deviation. This
is a supplement to the basic strategy signed by the President in
January."

"If there's any significant difference, it is that the
agreement this time will hopefully eliminate all doubts (about
the government's commitment to reforms)," he said.

"This time, there is a very strong commitment and also an
instruction from the President himself in the cabinet meeting
that all agreements and commitments should be honored and should
be implemented to the letter." (prb/emb)