Indonesia still needs budget support

Indonesia still needs budget support

The following article is based on the presentation made by
Coordinating Minister for the Economy, Finance and Industry Kwik
Kian Gie to the local donor meeting in Jakarta on Dec. 14. This
is the first of two articles.

JAKARTA (JP): When Indonesia's new government took office just
two months ago, it inherited an enormous number of problems from
the past. Not least of these is the fact that our economy is
still mired in a deep recession, with real income levels for most
of the population well below levels two years ago.

Much of the private business sector is effectively bankrupt,
our financial system is still dysfunctional, and the state budget
is deeply in deficit. Complex issues of regional authority must
be worked out. Social and political grievances due to past
repression must be resolved and ethnic and religious harmony
strengthened.

All of these problems are urgent and require immediate
attention, but the capacity of our new political system to
respond to these tasks has not yet been fully tested.

Developing a sound economic program that will place Indonesia
well on the road to recovery is perhaps the greatest initial test
for the new government.

In developing our program we are working with all parts of
civil society and with the international community. We are also
seeking greater support and involvement from our legislative
branch of government and the International Monetary Fund recently
met with Commission IX of the House of Representatives (DPR) to
discuss the policies that are embodied in the letter of intent.

Never before has the government involved the DPR in advance in
the development of its positions taken with the IMF. We will
continue this involvement of the legislature in our discussions
in the future.

In preparing our economic program, we have been guided by four
principles: First, to strengthen the institutions of society and
government. Second, to guarantee macroeconomic stability. Third,
to reinvigorate the banking sector while promoting the
restructuring of corporate debt and the corporate sector. And
fourth, to protect the natural resources and the environment of
the nation.

Governance issues lie at the heart of our reform effort. We
are committed to taking significant steps toward strengthening
the institutions of government and society. A key commitment in
this area is our effort to reform the civil service.

The World Bank has performed a comprehensive review of civil
service issues that will assist us greatly in our efforts. While
comprehensive civil service reform is a long-term process, we are
taking a number of initial steps to improve the efficiency of
public administration and reduce corruption.

In this regard we have established the commission that will
oversee that implementation of our anticorruption laws and have
set up a special group within the Attorney General's office to
investigate and prosecute corruption in the legal system.

At the same time, we will be taking steps in the next budget
to begin the process of raising civil servant's wages to more
reasonable levels. However, we understand that pay reform is not
an end in and of itself. Instead, it must be part of a long-term
program to reinvigorate public administration. A fundamental step
in this process will be to open up a public discussion -- a
national dialogue, if you will -- on the issue of government
service to the public.

Significant steps have already been taken in the effort to
improve public administration. One of the first acts of the new
government was to fully disclose the Bank Bali case. We are
taking actions to resolve this case and to ensure that anyone
found to have violated the law is brought to court in an
expeditious manner.

We have also begun the process of exposing high level
political collusion in other cases, such as in the granting of
loans from state banks. This is a first step in cleaning up the
management of state banks and ensuring that in the future loans
are given on the basis of sound commercial principles rather than
on the basis of political connections.

These efforts can only succeed if they are supported by a
thorough reform of the legal system and the judiciary. Tough
anti-corruption legislation has been passed and measures put in
place to ensure that our courts have the will and capacity to
implement these laws.

However, we must recognize that the problem of corruption is
deeply rooted. It cannot be eliminated overnight, although we
expect to make rapid progress now that the main political
obstacles to reform have been overcome.

At the time we are committed to implementing the process of
decentralization which will bring the government closer to the
people. Decentralization is an essential antidote to Indonesia's
long history of excessive central authority, as well as being a
prerequisite for future social and political stability.

In developing our decentralization plans we will work closely
with the Governance Partnership Program proposed by the United
Nations Development Program and the World Bank.

We also recognize that decentralization must be implemented
with great care to ensure that growing regional autonomy does not
result in fragmentation. Although the problems that we face are
great, Indonesia has a 50-year history of national unity. During
that time we have repeatedly demonstrated that our resolve to
remain together exceeds any tendency toward disunity.

In addition to addressing the needs of public institutions, we
also are focusing our efforts on encouraging the reform of the
private sector. These efforts are focused primarily in three
areas: Reforming and restructuring the banking system, promoting
the resolution of the corporate debt problem, and promoting
improved corporate governance.

In the area of banking reform, we are committed to completing
the reorganization and recapitalization of all of the state banks
by June 2000. At the same time, we plan to have completed the
reorganization and consolidation of the taken over banks (BTO)
and frozen banks (BBO) by September of next year.

Following reorganization and recapitalization, we will move
forward with a vigorous program to privatize the banking system.
One of the unfortunate consequences of the financial sector
restructuring program has been that the government has ended up
owning most of Indonesia's banking sector.

This can only be a temporary solution. Past experience has
shown that the government is not a competent manager of banks.
This can be seen from the fact that state banks account for more
than one-half of the cost of restructuring the banking system
even though they accounted for only one-third of bank assets
prior to the crisis.

It can also be seen from the fact that Indonesian Banking
Restructuring Agency (IBRA) expects to recover only 4 percent of
the value of non-performing loans transferred to it by state
banks. The poor performance of state banks is related to the
highly politicized nature of their lending practices, with loans
too often being given on the basis of connections rather than on
the basis of sound commercial principles.

Given this record, privatization of state banks and BTO banks
is a prerequisite for creating a healthy financial system. We
expect to begin the privatization process by selling part of the
government's stake in Bank Central Asia by BTO banks.

Another important area of focus in the banking sector is the
operation of the bank restructuring agency. IBRA is the key to
containing the net cost of the financial sector restructuring
program. It is impossible to fully cover the commitments that we
have made with respect to IBRA in these short remarks.

However, I would like to highlight several points. First, we
expect to fully resolve all inter-bank claims by the end of the
year. Second, we are putting in place a process that will ensure
that IBRA's accounts are carefully audited on a regular basis and
that those accounts are made public.

Third, we are preparing clear and transparent guidelines for
IBRA to apply in considering requests for reschedulings and
haircuts for debts in its portfolio, while recognizing that all
proposals must be reviewed on an individual basis. This should
facilitate the process of corporate debt restructuring in cases
where IBRA is involved.

Fourth, IBRA is beginning to use its extraordinary powers to
bring uncooperative debtors to court. We hope that this will
encourage all debtors to be more forthcoming in the future.
Finally, IBRA is committed to the orderly but rapid sale of the
assets under its control, based on our recognition that it is
critical that the productive assets of the nation be returned to
the private sector as quickly as possible.

We are actively seeking international participation in all of
our assets sales. Although we are pursuing an Indonesia first
policy for asset sales, this policy only applies when an
equivalent bid has been made by an Indonesian firm.