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Indonesia Pledges Major Reform in Pact with IMF

By Raju Gopalakrishnan, Reuters

Enny Nuraheni/Reuters
The Indonesian government said 46 of the listed reforms had already been implemented

JAKARTA — Indonesia said Thursday it had agreed with the International Monetary Fund on a comprehensive package of 117 reform measures to revive its battered economy, with precise dates to implement all key points.

In its third agreement with the IMF in six months, Indonesia vowed to tackle $74 billion in private debt and said it hoped to stabilize its volatile rupiah currency.

In a document on the accord, the Indonesian government said 46 of the listed reforms had already been implemented.

Indonesia, suffering its worst economic crisis in decades, was forced last year to accept an IMF-led bail-out package worth more than $40 billion after a massive slump in the value of the rupiah.

But Jakarta has been slow to implement IMF-prescribed reforms and the IMF held back $3 billion of the package last month, pending a review of the program's progress.

The government said in the memorandum it expects the rupiah to stabilize at better than 6,000 to the dollar, over time. It said it was tightening monetary policy to bring the exchange rate to a more appropriate level and reduce inflation.

"We expect that the exchange rate will eventually stabilize below 6,000 rupiah per U.S. dollar," it said. "On that basis, inflation would decelerate quickly, but would probably still amount to over 45 percent during 1998 as a whole," it said.

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The rupiah strengthened marginally to about 8,000 to the dollar Thursday news the package had been agreed on, but was still down some 70 percent from its July level of 2,400.

The plunge has thrown the economy into its worst crisis in three decades, triggered soaring inflation and doubled unemployment to about 10 percent of the workforce of 90 million people.

The new measures include commitments from the Indonesian government to set up a bankruptcy law, an anti-monopoly law and a special court to cover bankruptcy proceedings.

The memorandum also announced the end of a ban on the export of crude palm oil and what taxes it would be replaced by, a concrete program for privatization of state enterprises and details of accelerated bank restructuring.

To prevent any possibility of backsliding on commitments, target dates have been agreed for implementation of all the new reforms.

Hubert Neiss, director of the Asia-Pacific department of the IMF, said he was confident Indonesia would carry through the sweeping reforms.

But he added in an interview with Reuters: "I cannot be absolutely sure, nobody can be absolutely sure ..."

Therefore, he said, "We have to build as many safeguards as possible into the program to ensure a maximum degree of certainty that this program will not remain just on paper, but it will become step-by-step reality."

Neiss, who has headed the IMF review team in three weeks of negotiations, was due to return to Washington Friday.

Indonesia and the IMF initially agreed on the reforms in October, but the package was revised in January as the economy continued to worsen and the government appeared to be backsliding on its commitments.

The IMF is conducting quarterly reviews of the Indonesian program, and the latest revision followed discussions with a new economic team appointed following President Suharto's re-election for a seventh five-year term by a rubber-stamp assembly March 11.

One of the key problem areas has been the level of private debt, which has left most companies in the country technically bankrupt.

The memorandum of understanding offers the outline of a framework being negotiated by creditors, debtors and the government to resolve the debt.

Neiss said the government would participate in the framework, perhaps by providing an exchange rate guarantee.

"The important issue is ... the way this guarantee is phrased, what exchange rate is chosen, what interest rate is chosen (both for the rupiah and foreign currencies), what grace period, what total maturity is chosen into which the short-term debt is rolled over."

Neiss said these all had implications for the government and one of the principles was that the potential loss to the government be limited.

"We want to minimize the losses of the government, but we still want to make the system sufficiently attractive so that creditors and debtors actually use it," he said.

Indonesia will also gradually raise fuel and electricity prices in the 1998/99 (April-March) fiscal year.

Subsidies on rice and other essential foods will be in place for some time, the memorandum said. Prices of other food items will rise in April and the subsidies on most of them will be phased out by October.

The subsidy on rice, Indonesia's major staple, will remain in place but will be diluted with a price rise in October, it added.

The government has been careful to ensure that prices of essential goods are not raised drastically because of the potential for unrest in the nation of 200 million people.

Riots broke out in some two dozen towns across the country in February after rises in the prices of essentials.

In Rome, two U.N. food agencies said Indonesia would face a record food deficit this year as a result of lower harvests and the financial crisis, that has raised the cost of imports.

In a joint report, the Food and Agriculture Organization and the World Food Program said large-scale international assistance would be needed to meet a shortfall in rice.

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