Indonesia - Passing An IMF Test

By Scott B. MacDonald

TIn early December the International Monetary Fund completed its seventh review of Indonesia's performance under a SDR 3.638 billion (about US$4.8 billion) Extended Fund Facility arrangement. This paves the way for release of a further SDR 275.24 million (about US$365 million), bringing the total amount drawn under the arrangement to SDR 2.262 billion (about US$3 billion).

The key points of the IMF’s report were that Indonesia’s macroeconomic developments in 2002 were favorable, with steady economic growth, moderating inflation, and a strengthening balance of payments. The IMF report did, however, note that the economic outlook deteriorated as a result of the recent terrorist attack in Bali in November. As the IMF stated: “The attack poses new challenges, which must be met, on the economic front, through the continued firm implementation of the government's reform program.”

Indonesia was given credit for the important progress achieved during 2002 in laying the foundation for a durable improvement in macroeconomic fundamentals, including generally prudent policy. The recently-approved 2003 budget is regarded as striking the “appropriate balance between ensuring further fiscal consolidation to reduce the public debt and providing support for the economy in the aftermath of the Bali attack.” The terrorist attack in Bali will clearly have a negative impact on tourism, a significant source of income for the local economy. The budget also preserves development and social spending as well as eliminating remaining fuel subsidies with the exception of those on household kerosene. The budget also targets an appropriately ambitious non-oil and non-gas revenue increase through improvements in tax administration and additional tax policy measures.

The IMF also gave Indonesia a positive nod for the continued recovery of bank and state enterprise assets. This is important in reducing public debt levels. IBRA's broad-based loan sale program has been successfully concluded, with the new priority being the sale of IBRA's remaining assets and to collect payment from cooperating debtors under the revised terms of the bank shareholder settlement agreements. The IMF did note that it was necessary to take enforcement actions against debtors who remain noncompliant with their settlement agreements. This remains a problem, especially if Indonesia wishes to attract greater foreign investment. It also cuts to the heart of what kind of Indonesia the new democratic government wants to create. A more sustained effort will also be required to consolidate the momentum of the government's privatization program, which was reinvigorated with the sale of a small stake in PT Telkom and the intended sale of a strategic stake in Indosat. The momentum of bank divestment has been restored with the sale of Bank Niaga despite some degree of protests. The focus has now shifted to the sale of a majority stake in Bank Danamon, to be followed in 2003 with the sale of Bank Lippo and, thereafter, the remaining IBRA banks.

The IMF report concludes: "Accelerated progress in implementing legal and judicial reform and establishing the rule of law is critical to improve governance and strengthen the investment climate, which continues to suffer from the widespread perception of judicial corruption and weaknesses in the legal framework. Establishment of the Anti-Corruption Commission, ongoing reform of the commercial court, and revisions to the bankruptcy law will be important milestones in this effort."