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)