Soeharto unveils sweeping reforms

Soeharto unveils sweeping reforms

JAKARTA (JP): President Soeharto announced a series of drastic
economic measures yesterday which are expected to lift the nation
out of its present predicament.

But he warned that the nation must brace for a difficult time
before things improved, predicting zero economic growth and 20
percent inflation this year, fueled in part by sharp increases in
the fuel prices beginning in April.

On a positive note, the head of state promised to tighten
banking rules and supervision to prevent more liquidations in the
future. The government will also introduce a deposit insurance
scheme to protect the money of bank depositors.

Soeharto signed a letter of intent yesterday pledging the
International Monetary Fund (IMF) carry out sweeping economic
reforms to try to end the economic crisis.

The two-page letter was accompanied by a 13-page 50-point
memorandum detailing the measures the government plan to
introduce.

The details were worked out between government officials and
an IMF team led by deputy managing director Stanley Fischer
earlier in the week. The IMF organized a US$43 billion
international rescue package for Indonesia in exchange for
Jakarta's pledge to carry out economic reforms.

The two sides agreed to review these reforms last week when
the crisis deepened.

Immediately after presenting the documents to IMF Managing
Director Michel Camdessus, Soeharto held a rare media conference
in the living room of his Jl. Cendana residence to personally
present details of the economic package. In the past, new
economic policies were announced by his ministers.

The reforms mean that the 1998/1999 draft budget (for the year
starting April 1) which he presented to the House of
Representatives last week, will have to be reviewed.

The draft had used some assumptions that the world, including
the IMF, regarded as ambitious and as failing to reflect the
economic reality in Indonesia, he said.

"I accept their judgment. The problem is that we used a
different set of criteria," he said.

"I had estimated a growth rate of 4 percent while they
believed it to be zero percent; I had put inflation at 9 percent
while they feel 20 percent is more appropriate; and I had used an
exchange rate of Rp 4,000 to the dollar while they said it should
be Rp 5,000.

"I had expected a government saving equivalent to 1 percent of
the gross domestic product, but the IMF said we would have a
deficit in the budget," he said.

He added, however, that any deficit in the budget would not be
covered by domestic borrowings, but rather by foreign aid.

One spending item to be adjusted is the Rp 10 trillion entry
on fuel subsidy which must now be abolished. This, in turn, means
hikes in transportation and electricity costs.

Soeharto said the government had intended to phase out the
subsidy, but it had differed with IMF on the timing.

"Around this time of the year, people's spending is higher
than usual to meet their needs for Christmas, New Year, Ramadhan
and Idul Fitri. So we will have to be particularly careful about
the timing."

He did not say when the increases would become effective but
the memorandum to the IMF stated that the biggest chunk of the
increase would become effective on April 1.

Soeharto pledged to tighten the rules as well as supervision
of the more than 200 commercial banks, and would encourage them
to strengthen their positions "so that none of them would have to
be liquidated".

The government would also work toward restoring people's
confidence in the banking system, he said.

In the past few months, many people have taken their money out
of private commercial banks for fear of more banks collapsing.

They had put their money in state banks and foreign banks, and
some also bought dollars, or even stashed their cash under their
pillows, Soeharto said.

"To restore their confidence, small depositors need some
assurances that if a bank collapses, their money is protected. If
we have to, we will establish a deposit insurance scheme," he
said.

Soeharto also dismantled various monopolies and privileges.

Bulog, the national food logistic agency, lost its monopoly
over sugar and wheat imports and distribution but not that of
rice.

Soeharto showed reluctance at the decision, saying the move
could mean that sharp fluctuations in the price of these
commodities in the region, something which Bulog would normally
move to stabilize.

"Bulog is needed to protect the people as consumers and also
the people as producers," he said of the decision to retain the
monopoly on rice.

The Clove Marketing and Bufferstock Agency (BPPC), headed by
Soeharto's youngest son Tommy, would be stripped of its monopoly
on domestic trade and its functions would be taken over by
village cooperatives.

Soeharto noted that the cooperatives' association had
collected funds amounting to Rp 1.1 trillion through past BPPC
operations. The agency would be retained to act as consultants to
the cooperatives, he said.

Another Tommy's projects, the National Car, would lose all of
its privileges and would be treated like any other car producer.

The project, which began by distributing Korean-made KIA cars
sold under the Indonesian brand name of Timor, had enjoyed
exemptions from import tax and duties and access to massive state
credit.

These privileges were abolished with immediate effect,
Soeharto said.

Soeharto also cut further state funding for PT IPTN, the
state aircraft manufacturer based in Bandung. The company is also
no longer allowed to raise loans domestically.

This means that the N-2130 jet project, estimated to cost $2
billion, would have to be funded entirely from overseas.

Soeharto announced the establishment of the Council for
Economic and Monetary Resilience which he heads and will include
the entire members of the Monetary Council and representatives
from the private bank and private business sector.

The council, with senior economist Widjojo Nitisastro as
secretary-general, would review the implementation of the
economic policies every three months with an IMF representative
in Jakarta. "This is my responsibility. I have to lead the
council," he said.

Soeharto said these measures would take time to restore
investors' confidence in the economy. "Of course, we don't expect
them to flood Indonesia overnight."

But asked when he thought the monetary crisis would end, he
said: "It's all up to us. If we're willing to work hard, we
should be able to. After all, we have had 30 years of experience
in building a solid foundation." (prb/emb)