'RI needs to tighten fiscal policies'

JAKARTA (JP): The International Monetary Fund has commended Indonesia's sound macroeconomic policies, but is concerned with the short and medium-term challenges of high external debt levels, the current account deficit and an overheating economy.

The 1996 annual report of the Washington-based IMF, which was released here yesterday, calls for tighter fiscal and monetary policies combined with a more flexible exchange rate policy.

"Additional fiscal adjustment will be essential to increase public savings over the medium term and to limit short-term demand pressures," the report says.

IMF senior resident representative Khadim A. Al-Eyd briefed reporters yesterday on the main points of the latest annual report, including the main developments in the world economy, the world economic outlook, international capital markets and the IMF's activities during the 1995 fiscal year ended last April.

The report also stresses the need to limit spending to budgeted amounts and to resist pressure for extra-budgetary financing.

The IMF suggests that if higher interest rates result from a tighter monetary policy and lead to excessive capital inflows, the Indonesian government can allow market forces to play a greater role in exchange rate determination.

The report welcomes efforts to widen the rupiah's exchange rate band and urges further steps in the same direction.

Bank Indonesia moved on Wednesday to widen the intervention band of the rupiah by three percentage points to 8 percent, the second time in the last three months.

"The wider exchange rate band will allow for more private players in the foreign exchange market without too much intervention from the central bank," said Al-Eyd.

The IMF executive said that Bank Indonesia's moves, including the increase in the minimum reserve requirement to 5 percent, were essential to curbing credit growth to the target level set by the central bank.

Al-Eyd said, however, that except for the tendency of an overheating economy, Indonesia's economic fundamentals are very sound.

"The policy framework also is stable and solid," he added.

Report

The IMF reported that it has strengthened its surveillance operations since the financial crisis in Mexico at the end of 1994.

The surveillance of member countries' exchange rate policies has been strengthened by several initiatives, including a monthly meeting of its Executive Board to review major developments in selected countries and twice-yearly discussions by the Board of members' policies in the context of country surveillance.

The IMF, the report says, now gives greater importance to the analysis of capital account developments with closer scrutiny being paid to countries where developments could have potential spillover effects.

The IMF reported an unprecedented increase in its financial support to member countries to Special Drawing Rights (SDR) 18 billion (US$26 billion) in the 1995 fiscal year.

Of the total, SDR 6.9 billion was extended to Russia alone, the report says. (vin)