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.