'RI needs to tighten fiscal policies'

'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)