Neiss upbeat over RI economic recovery

Neiss upbeat over RI economic recovery

JAKARTA (JP): The International Monetary Fund Director for
Asia and the Pacific Hubert Neiss expects the Indonesian economy
to turn around in the second semester of next year, which will
provide a stronger basis for a sustainable appreciation of the
rupiah.

He said on Monday that persistent implementation of the
economic reform programs, especially in the banking sector, was
the key to the economic recovery.

"So if things work out, and that's not an unrealistic
assumption, we could see a turnaround in output next year. And
that turnaround would fully justify a strengthening of the
rupiah," he said.

"Although the rupiah is much better today, it is still too
much depreciated and needs to appreciate further," he added.

Neiss was speaking in a seminar held by the University of
Indonesia, in which noted economist Sri Mulyani was the co-
speaker, and Sabam Siagian, a member of the board of directors of
PT Bina Media Tenggara, the publisher of this newspaper, was the
moderator.

The IMF forecast the Indonesian economy to contract by at
least 15 percent this year and to remain in decline for the whole
of 1999.

"But that doesn't mean that it'll be negative from January to
December (1999). It'll probably be negative in the first half
and positive in the second half," Neiss said.

He explained that positive developments in inflation, balance
of payments, flow of foreign assistance and regional currencies
were favorable to the strengthening of the rupiah, but in the end
it will be the turnaround in the economy which will create a
sustainable appreciation in the currency.

"The strength of the country's currency must reflect the
strength of its economy," he pointed out.

The rupiah has been strengthening during the past couple of
weeks, closing at Rp 7,800 to the U.S. dollar on Monday, compared
to around Rp 12,000 last month.

"I hope the trend is to further appreciate. There could be ups
and downs in the short run, but in the longer run if things go
alright, if policies are implemented and the international
economy develops as we expected, then the rupiah should have an
upward trend," Neiss said.

He said that the country's monetary authority had started to
gradually lower the interest rates to kickstart the economy, but
stressed that it wouldn't be enough to deal with the economic
recession.

"Relaxing the tight monetary condition and expanding the
budget won't be enough, although it's important in the present
situation. We have to accelerate the restructuring of the
banking sector," he said.

"The deepest-seated problems have to be fixed, and they're
concentrated in the banking sector," he added.

He explained that the main elements of the bank reform were to
remove the bad loans in the industry and to recapitalize the
banks so that they could restart lending to the business sector.

"Fixing these problems is a much more difficult issue as it
involves measures where important vested interests are touched,
and there are pressures and counterpressures. Progress will not
be smooth. That is the challenge," he said.

"These deeply-rooted problems have to be fixed before
Indonesia can go back to growth that is sustainable," he added.

Neiss also said that in order for the reform programs to work,
political stability and public support for the programs were
essential.

The IMF on Monday concluded its monthly review of the
country's economic reform programs, which are being supported by
a multi-billion dollar bailout fund arranged by the Fund.

The IMF said in a statement that Indonesia had been making
encouraging progress in overcoming the crisis, the rupiah had
strengthened and inflation and interest rates had begun to
decline.

The monthly review resulted in a new letter of intent which
Neiss said did not make significant changes in the economic
programs but focused on the acceleration of banking reform and
government spending on a social safety net and employment
creation.

"It is important to emphasize that the government remains
committed to the free foreign exchange system, there will be no
restrictions on capital flows or repatriation of export
earnings," IMF said.

The letter of intent is expected to be considered by the IMF's
executive board later this month before releasing a further
disbursement of around US$1 billion in bailout money. The Fund
has so far disbursed $7 billion. (rei)