Indonesia making progress toward beating crisis: IMF

JAKARTA (JP): The country continues to make encouraging progress in overcoming its economic crisis but banking sector restructuring should be speeded up, the International Monetary Fund said on Sunday.

Following the completion of the regular monthly review of implementation of Indonesia's economic reform programs, the fund's Jakarta office noted in a statement that the rupiah had strengthened considerably, inflation slowed abruptly and interest rates begun to fall.

However, more needed to be done in the ailing banking sector.

"Banking sector restructuring needs to move forward rapidly, to revive the flow of credit to the economy... (and) restore a strong core banking system by early next year."

Results of the Nov. 9 to Nov. 13 program review will be availed to the IMF's executive board in a meeting in the first half of December, necessary before the release of another US$1 billion to the country.

The IMF has a total commitment of $11.3 billion to Indonesia's bailout package, with about $8 billion already disbursed.

It was the final monthly review. In the next six months, the fund will conduct reviews every two months, and quarterly thereafter.

The review was completed before a bloody clash between students and security forces occurred on Friday evening. Students protested the Special Session of the People's Consultative Assembly, which they considered unrepresentative of the people's aspirations.

The review focused on three key issues of the acceleration of banking restructuring, the expansion and acceleration of public expenditures for employment creation and the social safety net, and corporate sector restructuring.

Results of the review are contained in the Supplementary Memorandum of Economic and Financial Policies (MEFP), signed by the Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita.

"There is increasing evidence that macrostability is being restored, and that the economy's decline may finally be bottoming out," Ginandjar said in a Nov. 14 letter to IMF Managing Director Michel Camdessus.

The government said in the MEFP document that modest economic growth was expected to resume in the middle of 1999, with inflation for the year was projected to fall to about 10 percent, close to the pre-crisis level in 1996.

The document added that the output decline for this year could be contained close to the program projection of 15 percent, while average inflation could also fall within the targeted 80 percent level on the back of a further deflationary trend in the remaining months of the year.

There could be considerable room for further reductions in interest rates in the weeks ahead in tandem with the rupiah's strengthening, the government said.

It added that the monetary policy would be tightened if renewed dangers arose to threaten exchange rate stability.

The government intends to press ahead in recapitalizing viable private banks, despite an earlier outcry by bankers who said they lacked enough cash to finance the recapitalization program.

All commercial banks are required to have a minimum 4 percent capital adequacy ratio (CAR) by the end of this year, 8 percent by the end of 1999 and 10 percent by the end of 2000.

The government plans to finance up to 80 percent of the recapitalization financing needs. Qualification criteria for joining the program is a CAR level of between minus 25 percent and less than 4 percent.

The government's contribution to the recapitalization would be in the form of long-term bonds, including both market-linked and indexed bonds, the document said.

"Alternative resolution strategies will be implemented by Jan. 31, 1999, for banks unwilling or unable to participate in recapitalization including mergers or closure by Bank Indonesia.

"It is expected that by end-January 1999, a first group of eligible banks will be recapitalized."

The government also pledged to expand and accelerate its multibillion dollar 1998/1999 social spending to help the poor in surviving the country's worst economic crisis in three decades.

"We expect development expenditure to rise sharply during the second half of this fiscal year," the government said.

It added that only 21 percent of the social safety net budget was used during the first half of the year, mainly because of worries over the possibility of corruption and leakage. (rei)