To Restore Confidence: IMF and Indonesia Agree on Accelerated Economic Reforms

• Pages: 17-20

Page 17

As you know, an IMF staff team, together with Stanley Fischer [IMF First Deputy Managing Director] and myself, have over the last few days been discussing with the Indonesian authorities an acceleration and deepening of much-needed reforms agreed under the IMF-supported program.

This is why I am pleased today to announce that the government of Indonesia and the IMF have reached

The measures aim to restore confidence in the currency and the country. -Camdessus agreement on a much strengthened and reinforced economic program. Many of the measures in this program are new, others have been there from the beginning but are now being accelerated, but all have one common purpose: they aim to restore confidence in the currency and in the economy by demonstrating that the government recognizes the problems confronting the country and is prepared to take the necessary measures to overcome them, even if they are difficult and painful.

Let me summarize briefly the program that we have just agreed.

Broad Macroeconomic Framework. The program is designed to avoid a decline in output, while containing inflation to 20 percent this year, with the aim of bringing it back to the single-digit level next year, despite the sharp depreciation of the rupiah. At the Page 19 same time, the external current account balance is expected to move from a deficit into a sizable surplus, thereby generating additional foreign exchange to help the country repay its external debt. Budget. The 1998/99 budget will be revised to accord with the newly agreed macroeconomic framework, while still adhering to Indonesia's long-standing balanced-budget principle. Based on the IMF presentation, this would imply that the budget would record a small deficit, of about 1 percent of GDP, a level that strikes an appropriate balance between the need to avoid an undue fiscal deterioration and the need to avoid an undue fiscal contraction that would further depress economic activity. Nevertheless, to achieve this objective, serious measures will still be required. In particular, action will need to be taken to curb energy subsidies, which have grown to unsustainable proportions as the rupiah's depreciation has pushed domestic prices far below world levels. Accordingly, the government will phase out subsidies gradually by raising both fuel and electricity prices in steps, except for those on kerosene and certain diesel fuels, where increases will be kept to a minimum, so as to protect...