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Indonesia announces agreement with IMF, to sign later

JAKARTA, April 8 Kyodo

After three weeks of marathon negotiations, Indonesia and the International Monetary Fund (IMF) reached an accord Wednesday on a new package of measures included in a so-called supplementary memorandum.

The new agreement will pave the way for resumption of the 43 billion dollars of international bailout funds which the IMF helped to form last year, but were suspended while Indonesia altered its economic reform plans.

Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita said at the Bina Graha presidential office both sides have agreed on the revision of target figures for the country's 1998 budget, which started April 1 and will end March 31, 1999.

According to Ginandjar, both sides have predicted a shrinkage in the economy of 4% and inflation of 17%.

Originally the growth rate was reported at minus 5%, the inflation rate at 45%.

The cabinet members who attended the press conference did not disclose new assumptions about the exchange rate for the rupiah, the country's currency, although many expect both sides will agree on an exchange rate of 6,000 rupiahs to the U.S. dollar for the revised budget.

In January, the government released an IMF-sponsored fiscal budget that targeted zero economic growth, 20% inflation, and an exchange rate of 5,000 rupiahs to the dollar, well below the government's earlier predictions of 4% economic growth, 9 % inflation and the rupiah's exchange rate at 4,000 to the dollar.

The government will also cap its budget deficit at 3.2% of gross domestic product in the fiscal year, compared with a target of 1% in the IMF-backed Jan. 15 agreement governing the 43 billion dollar bailout package for Indonesia.

It is also looking at a budgeted oil price figure of 14.5 U.S. dollars a barrel, again well down from the previous 17 dollars a barrel.

Ginandjar said the supplementary memorandum, to supplement the memorandum agreed with the IMF in January, will be distributed first to the IMF executive board in Washington before being signed on ''perhaps today (Wednesday) or tomorrow (Thursday).''

IMF Asia-Pacific director Hubert Neiss, who led an IMF team in negotiations with the Indonesian government, said, however, the new agreement still requires approval IMF management and submission for consideration by the IMF executive board in which the 182 member countries of the fund are represented.

''The executive board will review the program and make a determination on the next disbursement to Indonesia, after the agreed prior actions have been implemented,'' he said.

The IMF delayed disbursement of a 3 billion dollar installment of the IMF-led rescue fund in the middle of last month after relations between Indonesia and the IMF hit a low point in February when the country was thought to be backing out of its commitment to the IMF-sponsored reforms.

Under the new agreement, Ginandjar said, both sides stressed the importance of efforts to help improve small and medium enterprises and cooperatives and to ease the burden on the poor caused by the monetary crisis.

''We agreed to guarantee adequate credit (and) loans for small and medium enterprises and cooperatives,'' he said.

''It is also stressed the (new) program should not cause worsening of economic and social conditions for poor people.''

The minister said the government will continue to subsidize rice and soybeans, but subsidies on other food commodities, cattle feed, raw materials for medicine, machinery components and fertilizers will end by October. No final decision has yet been taken on fuel, he said.

Touching on private-sector external debt, which accounts for 30.12 billion dollars of the country's 68.32 billion dollars in external debts, Ginandjar said the general principle ''is there must be a grace period, a rollover of the repayment period.''

''We want a three- to four-year rollover period, but the (actual timing) will be discussed further among (the lenders and borrowers).''

He said the government is preparing a plan to resolve the debt problem similar to one used by Mexico during its financial crisis from 1994 to 1995.

Mexico's so-called Ficorca plan, which current Mexican President Ernesto Zedillo managed, provided a government-supported umbrella for restructuring private-sector debt, with some tax concessions and domestic financing at preferential rates without a formal government guarantee.

Under the plan, the Mexican debt was rolled over for five to 10 years, and corporations were allowed to repay in pesos rather than dollars to Ficorca, an institution established by the government. Creditors received their payments in U.S. dollars from Ficorca.

To stabilize Indonesia's money market and to prevent hyperinflation, both sides agreed Wednesday that Indonesia ''should renew its central bank law to guarantee its autonomy'' and maintain a high interest rate policy.

Two weeks ago, Bank Indonesia, the central bank, doubled interest rates on its benchmark instruments to a range of 40-45% for promissory notes of one week to two months.

The rise is designed to soak up excess liquidity that is threatening to increase inflationary pressures and further weaken the rupiah.

Indonesia is experiencing its worst-ever economic crisis, prompted by the sharp decline in the rupiah. The currency fell to its lowest level -- 17,000 to the dollar -- in January. Before the crisis began last July, the rupiah traded at 2,450 to the dollar.

''Efforts to restore economic condition are not an easy and simple work and must be done with overall policies and implemented consistently,'' Ginandjar said.

''In the next few days, though, there will be a new agreement with the IMF. We still need to tighten our belts and face many difficulties whose impact will be bitter for the people.''
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Publication:Asian Economic News
Date:Apr 13, 1998
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