Reform targets hinge on improved market confidence

JAKARTA (JP): The government said its macroeconomic targets, as contained in the next letter of intent (LoI), depended on the recovery of market confidence this year amid doubts over the country's economic prospects due to continued political instability.

The LoI draft, dated July 11 and a copy of which was made available to The Jakarta Post on Monday, sets a macroeconomic framework targeting economic growth of 3 percent to 3.5 percent, and inflation of between 9 percent and 11 percent.

"This framework is predicated on a recovery in market confidence in the latter part of the year," the government said in the LoI draft.

The draft LoI, which outlines a set of economic reform targets, was agreed on by the government and the International Monetary Fund (IMF) on Friday.

But the IMF said the draft had yet to be approved by the IMF executive board in Washington, with approval only expected sometime in September.

Signing the final LoI would pave the way for the disbursement of the Fund's long delayed US$400 million loan tranche.

Indonesia must abide by the LoI targets to obtain the Fund's third tranche of US$400 million, out of the total $5 billion extended facility allotted over a three-year period.

Coordinating Minister for the Economy Burhanuddin Abdullah said earlier that political instability was a constraint to meeting the LoI targets.

"We have to deal with very challenging issues during the current political environment but the IMF team was able to show considerable understanding," he said last week.

The government has long been complaining that political instability was undermining market confidence and making it hard to achieve privatization and asset sales targets.

Plans to privatize 16 state enterprises this year are progressing slowly due to a reluctance to sell the shares amid a sluggish market.

The Indonesian Bank Restructuring Agency (IBRA) faces difficulties in selling assets as bidders are demanding greater discounts due to the high level of political risk.

The inclusion of IBRA's sales targets under the LoI had also presented the government with the dilemma of having to sell the assets cheaply or risking missing the LoI deadline.

A decision to shelve the divestment of Bank Central Asia (BCA) and Bank Niaga last October was one of the reasons why the IMF suspended its loan program.

Now, under the July 11 draft, the government expects to sell off a 51 percent stake in Bank Niaga by the end of September, and a 30 percent stake in BCA sometime in the third quarter.

In line with the government's request, the current LoI draft contains fewer targets than the LoI signed last September.

Instead of the previous 67 items, the latest draft stipulates only 35 items, while the July 11 draft had 37.

According to the IMF, the current draft focuses on maintaining macroeconomic stability, while seeking to accelerate restructuring through IBRA and the Jakarta Initiative Task Force (JITF).

Concerning IBRA, the government said it hoped to maximize the agency's recovery rates after the issuance of a set of principles on debt restructuring last April.

On the JITF, it said that providing tax relief would encourage debtors to restructure their debts in cooperation with the task force.

In consolidating the banking sector, the government said it would continue to seek mergers and the closure of weak banks.

"Banks unable to achieve prudential compliance -- including an eight percent capital adequacy ratio by the end of 2001 -- within specified time periods will be transferred to IBRA for resolution," the government said.

On legal reform, the government plans to amend the current bankruptcy law as many believe it contains loopholes that made it difficult for IBRA to have bad debtors declared bankrupt.

Elsewhere, the government said it would review along with the IMF and the World Bank the implementation of the 2001 state budget in mid-September.

"This review will allow for further assessment to be made of the course of the budget and its financing, and whether additional measures are needed to keep it on track," the draft said.

The final LoI should contain examples of the measures, but these were not stated in the July 11 draft. (bkm)