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)