Indonesia signs new Letter of Intent with IMF
Indonesia signs new Letter of Intent with IMF
The following is the first part of the complete text of the
new Letter of Intent signed by the Indonesian government and the
International Monetary Fund on Thursday. The second part of the
text will appear on Friday.
Jakarta, Indonesia
January 20, 2000
Government of Indonesia and Bank Indonesia
Memorandum of Economic and Financial Policies Medium-Term
Strategy and Policies for 1999/2000 and 2000
I. INTRODUCTION
1. With the completion of Indonesia's political transition, and
the election of a government with a wide popular mandate,
Indonesia now has an historic opportunity to join its neighbors
in a strong recovery and enhance the wellbeing of the Indonesian
people.
2. Much was achieved under the previous extended arrangement when
Indonesia made significant progress in restoring macroeconomic
stability, dealing with the financial crisis, advancing
structural reforms, and assuring food security. The macroeconomic
achievements include the elimination of inflation, the
stabilization of the rupiah, and recovering foreign exchange
reserves. The financial sector has begun to stabilize, interest
rates have fallen below pre-crisis levels, and bank restructuring
and recapitalization have started.
3. However, much remains to be done to revive the real economy
and lay the foundation for a sustained recovery that would
increase employment, reduce poverty, and assure equality of
opportunity. These challenges constitute the principal agenda of
the State Policy Guidelines that have been approved by
Indonesia's democratically elected Parliament. Based on these
guidelines, the government has now adopted a comprehensive
economic program that would accelerate the restructuring of
Indonesia's economy and meet these challenges.
II. MEDIUM-TERM ECONOMIC STRATEGY
4. The medium-term strategy has four main planks. First, to make
the macroeconomic policy mix fully supportive of recovery while
entrenching basic price stability. Second, to reinvigorate bank,
corporate, and other restructuring policies, which are crucial to
sustaining an economic recovery accompanied by lasting poverty
reduction. Third, to rebuild key public institutions, thereby
strengthening Indonesia's capacity to implement economic and
social policies with popular support, transparency, and good
governance. Fourth, to improve greatly natural resource
management, arrest the long-term deterioration in the
environment, and ensure the sustainable use of natural resources
for future generations.
A. Medium-Term Macroeconomic Framework
5. The strategy envisages restoring a growth rate of 5-6 percent
over the medium term, and Bank Indonesia (in the context of the
new Central Banking Act) has adopted a target of keeping
inflation below 5 percent annually. Although the external current
account would weaken over the next several years, as investment
picks up, official financing and improvements in private capital
flows (including the return of flight capital) should readily
offset the decline in the current account surplus. We are
confident that the need for exceptional balance of payments
financing would be eliminated by the end of the program period,
while the import coverage of liquid reserves would be maintained
at about six months. The government debt-to-GDP ratio should
decline from its recent peak of about 100 percent to about 65
percent by 2004, helped by falling interest rates and IBRA's
asset recovery.
6. Key to attaining these objectives will be a range of fiscal
reforms, affecting both revenues and expenditures. These reforms
will be introduced concurrently with implementing fiscal
decentralization by June 2001, consistent with the Regional
Governance and Fiscal Balance Laws, and without increasing the
General Government deficit.
B. Restructuring Policies
7. Financial and corporate reforms lie at the heart of the
program, and the government is resolved to carry these forward in
an integrated and coherent way. The strategic objectives of our
bank restructuring program are four-fold: (i) capitalize all
banks to at least 8 percent CAR by end-2001, as a precondition to
the eventual replacement of the comprehensive guarantee by self-
financed deposit insurance; (ii) ensure that the banking system
is restructured at minimum public cost; (iii) enhance supervision
and instill much improved governance in the banking sector; and
(iv) deepen bond and equity markets, allowing dependence on bank
finance to be reduced.
8. In tandem with bank restructuring efforts, corporate
restructuring needs to move ahead with much greater momentum in
order to restart credit flows that are needed to sustain the
recovery. This will require changing the incentive structure
faced by corporate debtors and strengthening the institutional
structure for corporate restructuring.
The government intends to do this by giving new political
leadership and direction to the corporate restructuring strategy,
improving the implementation of the bankruptcy law, enhancing the
governance framework in the judiciary, instructing IBRA to
intensify implementation of its sequenced strategy toward its
corporate debtors, and strengthening procedures for non-IBRA-led
restructuring.
9. To ensure that the benefits of economic recovery are widely
shared among the Indonesian people, the strategy includes a wide
range of structural measures. Thus, reforms to strengthen
agriculture, increase the opportunities to the small scale
sector, improve targeted spending programs, and upgrade the human
infrastructure will help ensure that recovery is accompanied by
sustained poverty reduction. They will be supported by measures
to deepen competition in the economy, inter alia, through the
restructuring and reform of the state-owned enterprises,
especially in the energy sector.
10. In particular, the program for the reform and privatization
of the state-owned enterprises represents a central element of
the government's broader strategy for improving the performance
of the public sector, and enhancing overall corporate
competitiveness. While privatization is expected to generate
considerable revenues over the coming years, and support public
debt reduction, this is not seen as its sole objective. Rather,
the ultimate objective of the privatization program is to create
efficient and viable enterprises. In all instances, privatization
will be undertaken transparently using best practice procedures.
C. Rebuilding Economic Institutions
11. There is widespread consensus in Indonesian society that key
economic institutions need to be rebuilt or strengthened in order
to command the trust of the people and allow the smooth
implementation of the medium-term policy agenda. Insufficient
attention to institution building over a long period led to a
steady erosion in the governance framework for economic and
social activities, contributing to the depth of Indonesia's
financial crisis, and burdening the recovery process.
Reversing this situation will not be easy; our early
priorities will be in the public sector (fiscal management and
civil service reform), financial sector (IBRA, the state-owned
banks, and the regulatory and supervisory institutions), the
judiciary, and the institutions responsible for corporate
governance.
12. The task of improving governance in fiscal management is vast
and complex, and crucial to regaining public confidence as well
as sustaining fiscal adjustment and public debt reduction. The
tax system needs to be reformed to ensure that it is broad-based,
nondistortionary, equitable, and transparent. Tax administration
has to be overhauled to ensure that regulations are implemented
faithfully and in an even-handed manner.
The governance of spending programs must be greatly improved
and the allocation of funds redirected toward poverty alleviation
to promote interregional equity and increase efficiency in the
provision of public goods. Fiscal transparency needs to be
enhanced by identifying and auditing off-budget activities and
bringing them under the consolidated budget. Wages to public
servants need to be increased, in line with improved governance
and within the government's fiscal capacity, so as to create a
more professional civil service with high standards and
integrity.
13. Implementing fiscal decentralization will require new
institutions which will need to work in close consultation with
regional authorities and civil society. A Consultative Regional
Autonomy Council will be established shortly to oversee
implementation of decentralization. A grants administration (a
Fiscal Balance Secretariat) will be established to design the
rules for transfers. The Ministry of Finance has been designated
as the lead agency for implementing all fiscal aspects of
decentralization, in consultation with the Fiscal Balance
Secretariat. A full-time fiscal decentralization advisor is being
appointed to the MOF. The accountability of lower levels of
government will need to be developed, and the regional tax base
increased; toward these ends, a review of tax legislation and
administration has been launched, and regulations for regional
financial management will be developed by June 2000. A central
database for regional government financial information will be
established to support central policy formulation.
14. The newly independent Bank Indonesia (BI) has a great
responsibility to support the recovery, by maintaining price
stability, rebuilding bank supervision, and ensuring a high level
of disclosure of banking activities. Prudential supervision of
the financial system needs to be carried as quickly as possible
to international standards. Effective oversight of BI will be
exercised through regular reporting to Parliament.
15. Improving public confidence in the integrity of the judiciary
and in the efficacy of the legal process is a vital objective of
institutional reform and key to economic restructuring. Thus, we
have adopted a comprehensive agenda of legal and judicial reform
with four key programs aimed at good governance in the legal
system and administrative law reform; improved administration of
justice; legal education, testing and discipline; and improved
legislative capabilities. The program includes measures to reduce
the opportunities for corruption (by improving the transparency
and speed of legal proceedings) while, at the same time, creating
powerful disincentives for corrupt practices (including
prosecutions of the parties that engage in such practices). We
also intend to enhance the role of the Attorney Generals Office,
reform the court system, and seek: parliamentary confirmation for
all appointments to the Supreme Court. The IMF, World Bank, and
AsDB will assist in mobilizing financial and expert assistance to
the Attorney General's Office.
16. IBRA is crucial to meeting the objectives of restoring a
sound banking system as well as promoting corporate restructuring
and asset recovery to reduce the public debt. To accomplish these
tasks, IBRA needs to be protected from narrow political
interests; it also needs to be administered by professionals in a
transparent manner, and have an unassailable governance
structure, including a strong oversight body. The government is
committed to assuring these conditions, and establishing a fully
effective governance structure in consultation with the IMF, the
World Bank, and the AsDB. We expect that IBRA will largely
complete its work in restructuring financial institutions and
recovering asset value during the period of the program.
17. The governance structures of other economic institutions are
also being reviewed and improved to upgrade corporate governance.
This will include adopting a new code of corporate governance,
strengthening capital market regulation at the Securities and
Exchange Commission (BAPEPAM), and improving the oversight of
nonbank financial institutions at the Ministry of Finance.
D. Improved Natural Resource Management
18. Indonesia's natural environment has continued to deteriorate
during the crisis. Weak policy implementation and weak market
institutions have combined to undermine Indonesia's base of
natural resources. We recognize the key role natural resources
play in the Indonesian economy and are determined that our
policies and programs ensure their sustainable use for the
benefit of this and future generations.
19. Our policy and institutional framework for natural resource
management will focus on three key objectives. First, we will
include greater consultation and stakeholder participation in
decisions affecting our natural resources, particularly in the
formulation of new policies, and the location and selection of
public investments. To ensure that these decisions are based on
good information, we propose to expand and improve environmental
monitoring of Indonesia's air, water, forests, and marine
resources. Second, we will move towards a pricing structure for
natural resources that better reflects their true value. And
third, we will pay special attention to improving forest
management and ensuring a sustainable production of goods and
services from our forest resources.
III. MACROECONOMIC POLICIES FOR 1999/2000 AND 2000
20. Consistent with the medium-term framework, our near-term
macroeconomic policies are based on growth being in the 1-2
percent range in l999/2000, strengthening to the 3-4 percent
range during FY 2000. Low single-digit inflation will be
entrenched. The external reserve position will be further
strengthened. Fiscal, monetary, and external policies have been
formulated to contribute to these outcomes, and will be regularly
reviewed to address risks that may materialize.
Fiscal Policy and the Social Safety Net
21. The fiscal deficit for 1999/2000 is currently estimated at
about 3 3/4 percent of GDP. Inclusive of the settlement of
arrears, the budgetary financing need is estimated at about 5
percent of GDP. This is below the original program because of
development spending shortfalls in the first half of the year
(associated with the political transition), and higher oil prices
and revenues. An ongoing recovery in development spending should
ensure positive fiscal stimulus during the second half of the
fiscal year. The financing need will be fully met by
privatization receipts, asset recovery, and foreign financing.
22. We have established clear principles for the FY 2000 budget
which was submitted to Parliament today. First, to strike a
careful balance between supporting the economic recovery and
starting the process of reducing government debt. Second, to
continue to avoid domestic bank financing. Third, to initiate a
range of structural tax reforms, whose full impact will accrue
over-the medium term. Fourth, to start the process of gradually
reducing untargeted subsidies, while protecting small household
users from their impact, and strengthening targeted poverty-
alleviation programs. Fifth, to begin to restore public sector
wages, especially for the most senior officials, concurrently
with administrative reform and stringent penalties on corruption.
On this basis, we expect that the FY 2000 budget deficit will be
5 percent of GDP, financed about equally from domestic (asset
recovery and privatization) and foreign sources.
23. The wage differential with the private sector is very high;
particularly at the top echelons, and correcting this
differential is an integral part of civil service reform, and
will be accompanied by anti-corruption efforts. With these key
objectives in mind, we have decided to raise the basic wages of
public employees in two installments of 10 percent each, to be
implemented on April 1 and Oct. 1, 2000, thus achieving a total
wage increase of 2.0 percent during the year. Larger increases
will be given to higher civil service echelons, including state
officers and the judiciary. With these increases, total personnel
expenditure is projected to increase by 16 percent to Rp 45.7
trillion.
24. There are three main elements to our social spending: the
social safety net (SSN); poverty alleviation programs; and
targeted fuel and energy subsidies. Overall social spending is
projected to be Rp 8.5 trillion in FY 2000. Of this total, SSN
programs are projected at Rp 2.7 trillion and have the following
principal components: (i) the rice distribution (OPK) program;
(ii) a health component; (iii) specific employment programs,
including to enhance women's employment; (iv) a program to
provide funds directly to communities; (v) scholarships to needy
students and block grants to targeted schools; and (vi) poverty
alleviation. These programs have enhanced monitoring provisions
and other safeguards to prevent abuse and protect implementation,
including frequent reporting on key performance indicators'
independent verification, and close involvement by NGOs and civil
society. They are being supplemented by the new poverty-
alleviation programs which are projected at Rp 4.5 trillion in FY
2000, and are being designed also in close consultation with the
World Bank and the AsDB. The new programs will be implemented
with the same monitoring provisions and safeguards. The proposed
mechanisms aimed at protecting low income households from the
energy tariff increases are projected at Rp 1.3 trillion in FY
2000.
Monetary and Exchange Rate Policies
25. Firm base money control, combined with a flexible exchange
rate policy, have anchored prices and strengthened the rupiah,
and there will be full continuity of these policies. Although the
uncertainties of August-October interrupted the process of making
monetary policy fully supportive of recovery, the declining trend
of money market interest rates has now resumed. Given the absence
of inflation, there remains room to guide interest rates down
cautiously further, as in the other Asian countries.
26. The monetary program for the remainder of 1999/2000 results
in a base money increase for the fiscal year as a whole of about
9 1/2 percent, to Rp 86 trillion. Compared with the previous
projection, this program is based on a slightly higher level of
net BI reserves. An indicative monetary program for 2000 has also
been formulated to accommodate anticipated higher growth. With
improved confidence reducing currency demand, base money is
targeted to increase to about Rp 92 trillion by end-December
2000. This base money program provides for the recovery of bank
credit to the private sector, and will be reviewed periodically
to ensure that it remains fully supportive of recovery and
responsive to unanticipated capital inflows.
Balance of Payments and External Policies
27. The external current account surplus in 1999/2000 is
projected to reach about $5billion (3.1 percent of GDP), about
$2.5 billion above previous projections because of the reduced
fiscal expansion and stronger oil export prices. Liquid reserves
are now projected to be $25 billion by the end of the fiscal
year, or about 6 months of imports; its coverage of short-term
debt will improve to over 70 percent.
28. With the onset of recovery and a strengthened currency, we
expect the current account surplus to decline in 2000, consistent
with the pattern experienced in the other Asian countries.
Current projections point to the current account surplus falling
to about $2 billion in FY 2000. Export volume growth should
strengthen, although this is expected to be outweighed by a
recovery of imports (which will still remain well below the pre-
crisis level). In the capital account, private capital flows
should improve, but new-pressures are expected from at least two
sources: (i) corporate reschedulings are likely to be associated
with prepayments on account of arrears; and (ii) banks are
expected to make payments consistent with contractual obligations
under the first exchange offer.
29. Consequently, we expect an external financing gap to emerge
again in FY 2000, of about $4.3 billion, linked closely to the
fiscal deficit. We are confident that the full amount of official
external financing will be available. We have requested another
principal rescheduling from The Group of Official Creditor
Countries of Indonesia for the 24-month period through March
2002; estimated relief during FY 2000 is about $2.1 billion. We
have been in touch with our multilateral creditors (especially
the World Bank and the AsDB) and bilateral creditors (especially
Japan) and have received assurances that the remaining amount of
financing should be available from these sources during FY 2000.
IV. STRUCTURAL REFORMS
A. Fiscal and Trade Policy Reforms
30. A range of structural fiscal reforms is being implemented to
underpin the increased efficiency, transparency, and institution
building planned for the public finances. Policies governing tax
holidays and free trade zones are being rationalized to keep the
tax system from being used to promote or discourage specific
sectors, industries, or regions, thus reducing abuse and evasion.
The efficiency of the value-added tax (VAT) is being improved by
phasing out unnecessary exemptions. Concrete steps are being
taken to improve tax and customs administration, improve the
targeting of large taxpayers, and combat fraud. An audit of the
tax office is expected to be completed by March 2000. Two new
amendments to tax laws (the VAT law and the Tax Procedure law)
are being prepared for submission to Parliament by February 2000
to strengthen the auditing and refund procedures and broaden the
tax base. A reform plan is also being implemented to rationalize
excise taxes on cigarettes. We will complete an audit of the
agricultural credit program (KUT) by March 2000 to improve its
efficiency and clarify its future role.
31. The Ministry of Finance intends to complete two reviews aimed
at delivering much increased fiscal transparency by end-March
2000. The first review aims at consolidating information on all
bank accounts controlled by government agencies. The second
review takes stock of off-budget funds. Based on these reviews,
we will consolidate off-budget accounts and funds, where
appropriate, by June 30. Any funds remaining outside the budget
will be subject to annual audit. In addition, we have instructed
the State Audit Board (BPKP) that any future internal audits of
financial operations of all government agencies take full account
of all extrabudgetary sources of support. This will begin in 2000
and will include the military.
32. We recognize that quasi-fiscal activities may also arise from
the operations of foundations and we intend to bring their
activities and accounts under government review and audit. The
Ministry of Law and Legislation will form a working group to make
policy recommendations and to draft legislation on foundations to
be submitted to Parliament by end-April 2000. The legislation
will require foundations to file a public statement of
activities, including audited accounts.
33. We reaffirm our commitment to maintain a liberal trade
regime, avoid introducing any new trade barriers, and remove
remaining distortionary elements in the trade structure. As part
of the 1995 tariff reduction plan, we recently reduced the import
tariff on a number of items from 10 percent to 5 percent and, by
end-2003, we will establish a three-tiered tariff structure (0,
5, and 10 percent) for all goods except alcohol and automobiles.
During the program period, we will eliminate all exemptions to
import tariffs (except those which are part of international
agreements), and remove all existing non-tariff barriers (except
those for health and safety reasons). As a step toward replacing
all export taxes and levies by resource rent taxes, the maximum
export tax on logs, sawn timber, and minerals was reduced to 15
percent by end-December 2000. This will be followed by a review
of forestry sector taxation policy starting January 200O, in
consultation with the World Bank. At the same time we will ensure
that the forest resource royalty rate (PSDH) captures at least 60
percent of the economic rent from logs and, thereby, protect
Indonesia's forests. Finally, we will eliminate all other export
restrictions (e.g., licensing requirements or government approval
on logs, coffee, and wood products), by end-2000, with the
exception of those needed under the multi-fiber agreement.
B. Fiscal Decentralization
34. The government is committed to implementing fiscal
decentralization according to the approved legal framework. The
decentralization framework specifies principles for sharing
natural resource-based government revenue, notably of oil
(devolution of 15 percent of onshore nontax revenue), gas (30
percent of onshore nontax revenue) and forestry (80 percent of
revenue? to regional authorities, and establishes a General
Allocation to regional authorities (at least 25 percent of total
domestic revenue). Implementation of these principles would
double transfers and shared revenues to 6 percent of GDP by 2002,
in step with the decentralization of most administrative and
social welfare functions. As a result, the share of regional
government spending is expected to double, to about 40 percent of
total spending by 2002, by which time it should total 7 percent
of GDP. We will ensure that fiscal transfers to the regions
promote equity by taking regions' revenue capacity and spending
needs into account; this will be the task of the grants
administration.
C. Banking System Reforms
35. Banking reforms lie at the heart of the economic program, and
an ambitious agenda for the year 2000 has been adopted. In many
areas, strong measures have already been taken to signal the
government's determination. The Financial Sector Policy Committee
(FSPC), which reports directly to the President, has been
established to give clear political leadership and direction in
the areas of banking and corporate restructuring. The FSPC is
headed by the Coordinating Minister for Economy, Finance, and
Industry, and includes the Minister of Finance, the Minister for
Investment and State-Owned Enterprises, the Minister of Trade and
Industry, and the Chairman of BAPPENAS. The Governor of Bank
Indonesia will be invited to attend meetings. The FSPC is in the
process of establishing a secretariat, including a coordinator to
liaise with IBRA and the JTTF.
Improved Governance in Banking
36. The government has taken a strong set of measures to reassure
the public, as well as markets, that the Bank Bali investigation
is being credibly advanced, and that systems and procedures have
been strengthened to prevent any recurrence. The Attorney General
is undertaking an investigation into the corruption aspects of
the Bank Bali matter, assisted by PwC, and has so far made one
indictment in the case; additional actions are expected to be
forthcoming as the investigation proceeds.
37. We are taking steps to ensure that future settlements under
the guarantee scheme are made expeditiously and that the process
is not compromised in any way. Thus, an international accounting
firm contracted by IBRA completed a preliminary examination of
all pending interbank claims in mid-December 1999, allowing a
first round of eligible claims to be paid at end-December. Based
on this examination, and in close collaboration with the IMF, the
World Bank, and the AsDB, IBRA will publicize new and fully
transparent procedures for processing claims under the guarantee
in February 2000. The eligibility of the remaining claims is
expected to be determined during February through a further
review conducted with the full cooperation of BI. All of the
claims deemed eligible in that review will be settled promptly
thereafter.
38. A comprehensive study, in collaboration with the World Bank,
has been launched to develop a strengthened governance and
oversight framework for IBRA, and an interim report is expected
during February 2000. On the basis of this report,
recommendations will be developed and final decisions taken no
later than March 31, 2000. Meanwhile, a number of essential steps
have been taken to strengthen IBRA: (i) the government has
reconfirmed IBRA's status as the sole publicly funded entity in
charge of asset recovery; (ii) the President has issued an
instruction clarifying that IBRA will report to his office on all
policy issues; (iii) IBRA is finalizing its accounting policies
on the basis of advice from international auditors; (iv) the
first audited accounts of IBRA's operations, covering its
position as of December 1999, will be publicized by end-April
2000, followed by regular quarterly and annual audited financial
statements; and (v) an Ombudsman's office will be established
within IBRA by end-January, 2000 to respond to all inquiries from
the public. The Independent Review Committee continues to
exercise oversight over IBRA.
Loan Collection and Asset Recovery
39. The institutional framework and sequenced strategy for loan
collection and asset recovery, focused on the largest borrowers,
continues to be implemented. The strategic objectives for March
31, 2000 are to complete restructuring MOUs for about 50 percent
of the loan value of IBRA's cooperating Category A debtors; and
to complete the valuation of the assets of at least 50 percent of
loan value of cooperating Category B borrowers. We are resolved
to take timely and evenhanded action against all noncooperating
debtors (Categories C and D). Their loan obligations and payment
records have already been made public, and IBRA's Legal
Department is now pursuing a strategy to ensure these accounts
are settled in an expeditious manner. The first round of formal
legal actions were taken in December 1999. In addition, all
state/BTO banks and IBRA will start in February releasing
quarterly reports on recovery performance on loans in categories
3, 4, and 5.
40. IBRA is on track with its recovery schedule aimed at
collecting at least Rp 17 trillion in cash by March 2000; and had
already recovered Rp 7.9 trillion by Nov. 30, 1999. IBRA has
adopted a minimum cash recovery target of Rp l6.3 trillion for FY
2000, including sales of assets and companies from its AMI (Asset
Management Investments) and recoveries on loans from its AMC
(Asset management Credits). In addition, IBRA is launching a
transparent process of outsourcing and/or sale of its smaller
loans (less than Rp 50 billion), with the first such disposition
scheduled to take place by end-March 2000. IBRA publishes
frequently, through the press, a schedule of auctions of noncore
assets, as well as transparent procedures for all asset sales.
41. IBRA has also made decisive progress toward completing
discussions with, and transferring shareholder assets from,
former owners or i998 and 1999 BTOs (banks taken over) and BBOs
(banks closed). With regard to the 13 1998 BTO and BBO banks that
had violated prudential regulations, the asset transfers from
seven bank owners are to be completed by Dec. 31, 1999; those
from two further bank owners are expected to be completed by
April 2000. The cases of the noncooperating shareholders of the
remaining four banks will be publicized in February 2000 and, if
not resolved, referred for prosecution to the Attorney General,
who will initiate court proceedings during March 2000. We expect
to finalize negotiations with the 46 1999 BTO/BBO banks by May
2000, and complete all associated asset transfers by end-October
2000.
State and BTO Bank Restructuring
42. State bank restructuring is being implemented under the
oversight of an interdepartmental Restructuring Committee, and
with the following safeguards. All state banks have been required
to prepare business plans will the help of international
advisors, and to contract with international banks for their loan
work-outs. The Ministry of Finance is establishing a fully funded
and staffed monitoring unit to ensure compliance of the state
banks with their performance contracts. The monitoring unit has
ensured that all state banks have transferred to IBRA all of
their category 5 loans (as well as any loans with provisions of
more than 50 percent), as of Sept. 30, 1999, together with all
loan documentation. Henceforth, all state banks will be subject
to an annual audit by international accounting firms, beginning
with their end-l999 positions.
43. Progress is most advanced in Blank Mandiri. Two branches of
capital have now been injected into the bank, the latest one (for
Rp 75 trillion) on Dec. 28, 1999, bringing the total bonds
provided to Rp 178 trillion. As a result, the bank's CAR has been
raised to above 4 percent, based on the December position
estimated by an international accounting firm. Any difference
with the:he final audited end-1999 accounts will be met by (or
repaid to) the government in early 2000, as soon as these
accounts become available.
44. At the same time, Bank Mandiri is taking decisive actions to
improve its operational performance in line with operational and
financial1 targets specified in the interim investment and
management performance agreement signed on Dec. 28, 1999. Efforts
are underway to improve services by hiring additional line
managers, and outsourcing the information technology system at
headquarters. To improve financial management, the bank has
established special teams to secure full information on the
bank's daily cash flow, and to complete the reconciliation of
interbranch items inherited from its component banks by Feb. 29,
2000. To improve transparency, the bank is publicizing the terms
and conditions of all its loan restructuring deals.
45. Concerning BNI, we intend to follow a similar restructuring,
starting with a management review. Following an international
executive search, a new management team will be appointed
following the shareholders'meeting. The government and the new
management will sign performance contracts by Feb. 29, 2000.
Thereafter, the new management will finalize agreement with an
international firm to enter into a twinning/management agreement
by March 31, 2000 to implement the full business plan, with
special emphasis on governance, risk management and the workout
of non-performing loans. The first tranche of recapitalization
will be provided only upon completion of the preceding actions,
expected by March 31, 2000. The remaining tranche will follow the
completion of the end-1999 financial audit, and implementation of
the business plan, expected by June 30, 2000.
46. BRI's financial plan, refocusing the bank on its traditional
activities of retail banking and microfinance, has been reviewed
by an international consultant and the full business plan is
expected to be reviewed and approved by the Restructuring
Committee in February 2000. Management is being reviewed and new
members recruited through an international executive search. We
expect that a new management team will be in place by February
15, 2000. BRI will begin in March to divest its corporate loans
except for certain traditional customers that will constitute a
maximum of 20 percent of its total portfolio. The process of
divesting corporate loans will be completed by end-2000. The
first tranche of recapitalization is expected to be provided by
April 15, 2000, upon completion of the preceding actions; the
remaining tranche will be provided following the completion of
the end-1999 financial audit and satisfactory implementation of
the business plan, expected by June 30, 2000, including the
future roles of BTN and of the housing credit program.
47. We intend to achieve majority privatization of BCA in 2000.
Toward this end we intend to launch BCA's initial public offering
of shares in March 2000; as a first step, a filing will be made
with BAPEPAM by-end January.
48. Danamon's divestment process will be delayed until its
mergers with eight BTO banks can be completed. One bank (PDFCI)
was merged into Danamon in late-December 1999, following approval
of the merger by BI; the remaining mergers should be completed by
September 2000. We have provided Danamon with a strong management
team, which was approved by Bank Indonesia on Dec. 15, 1999, and
business plans and a management contract were in January 2000. On
this basis, in May 2000, Bank Danamon will be provided with
recapitalization bonds of about Rp 30 trillion to allow it to
finance the remaining mergers. A timetable for achieving majority
privatization in 2001 will be drawn up by September 2000.
49. Steps are also being taken to resolve two banks-Bank Bali and
Bank Niaga--which were taken over when their owners failed to
come up with the funds necessary to participate in the private
bank recapitalization scheme. We plan to sell both banks by open
tender during the first half of 2000.
Private Bank Restructuring
50. BI is determined to ensure the soundness of the 73 A-category
banks. All owners and managers of these banks have been subject
to fit and proper tests, and those who failed have been replaced.
BI further required owners of banks whose capital fell below 4
percent to raise capital to that level by Jan. 20, 2000, and it
will take corrective actions against those banks where the owners
fail to comply with the requirement. Banks whose business plans
needed revision or correction to ensure compliance with the
requirement to achieve CARs of at least 8 percent by end-2001
have now submitted revised business plans, and these have been
reviewed. All A-category banks will be monitored on a quarterly
basis to ensure they comply with their business plan; BI will
take appropriate corrective actions in all cases where these
targets are not being achieved. Performance of the private banks
jointly recapitalized with the government will also be subject to
quarterly monitoring by IBRA and BI, and any substantial
deviations will be reported to the Ministry of Finance for
appropriate resolution.
Legal, Regulatory, and Supervisory Framework
51. The first audit of Bank Indonesia under the new central bank
law, conducted by the Supreme Audit (BPK) with the assistance of
an international accounting firm, was completed and sent to the
Parliament on Dec. 31, 1999. In response, BI has adopted a
timebound program of follow-up actions, aimed at addressing the
issues raised by the audit, which will be implemented in
cooperation with the BPK during the coming year. The action
program comprises a range of measures to clarify BI's financial
position, improve the bank's internal controls, and strengthen
its supervision standards.
Special audits are being commissioned to verify and revalue
BI's financial and tangible fixed assets, and assess the bank's
off-balance sheet positions by end-April 2000. Should this work
reveal the bank has a capital shortfall, the government will
provide an immediate injection of funds so that the bank meets
statutory requirements. At the same time, BI will take steps to
divest its financial subsidiaries, and to tighten internal
controls and strengthen information systems. The overall aim
would be to obtain an unqualified auditor's opinion for the end-
2000 financial accounts.
52. The authorities are adopting a comprehensive approach to
achieve and maintain the soundness of the overall financial
sector. Bank Indonesia will provide the IMF with monthly bank-by-
bank data beginning with end-December 1999. The Board of Bank
Indonesia has approved a master strategy for enhancing bank
supervision.
The strategy to be assisted by the IMF will guide
implementation of the reforms necessary to bring supervisory and
examination activities up to international standards, fully
consistent with the Basle Committee's Core Principles, and ensure
that technical assistance projects on bank supervision are
effectively coordinated.
It is envisaged that BI will maintain substantial on-site
supervisory presence at each state bank. Similar master plans
will be developed by end-March 2000 for the oversight of the
nonbank financial sector (pension funds, insurance companies, and
finance companies), and securities markets by the Ministry of
Finance, with the assistance of the World Bank and the AsDB. We
will also review and strengthen the law on pension funds during
2000.
53. We have issued additional bonds for bank capitalization and
are taking steps to develop a government bond market. The
Ministry of Finance, with the assistance of AusAid, has
established a unit to manage the public debt. Our progress and
plans in this area include the following:
As of end-December 1999, the government has issued bonds,
totaling about Rp 500 trillion rupiah, for the capitalization of
Bank Mandiri, the private and BTO banks, and to compensate BI for
its past liquidity support and the settlement of interbank
claims. It is expected that some Rp 140 trillion in additional
bonds will need to be issued by mid-2000, principally to complete
the recapitalization of the state banks. The interest burden on
the budget of these bonds is projected to peak at about 4.7
percent of GDP in FY 2000 before declining in subsequent years.
A portion of the capitalization bonds for banks with net open
foreign currency positions will be in the form of foreign
exchange-linked (rupiah-denominated) bonds, to enable these banks
to close their positions in an orderly manner.
A number of steps have been taken to begin secondary market
trading of government bonds over the next year. A committee is
being formed with participation from the Ministry of Finance and
BI to facilitate development and regulation of the market, and a
book-entry system is now operational within Bank Indonesia for
record-keeping and transfers of government bonds in paperless
form.
Regarding the tradability of the recapitalization bonds, banks
have (since Dec. 9, 1999) been permitted to transfer up to 10
percent of their bonds into a "trading portfolio." Initially,
these bonds may be used as collateral for borrowing. Starting in
February 2000, banks will be permitted to trade these bonds in
the secondary market. The portion of bonds in the trading
portfolio will thereafter be increased progressively.