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)