IMF Strikes Another Deal With Jakarta

The International Monetary Fund has outlined an $18-billion plan to help overhaul Indonesia’s banking system as part of an agreement to resume its aid to the country.

The new agreement, which comes after the IMF suspended aid from a $40-billion bailout plan because the government failed to keep promises in two earlier pacts, also outlines steps to end foreign ownership restrictions. It includes provisions to beef up bankruptcy laws, help companies repay foreign debt and sell shares in state companies to help attract money back into the country.

Most dramatically, the latest IMF plan aims to rein in the central bank, which has been stoking inflation by keeping crippled banks afloat. It aims to finance the Indonesian Bank Restructuring Agency--a newly created government body--through a government bond issue to be repaid as the agency restructures banks and sells some of those banks’ assets.

“The financial position of the domestic banking system has dramatically deteriorated, as the crisis in the economy has deepened,” the new IMF agreement says. “Bank Indonesia granted very large scale liquidity support, creating additional pressure on the exchange rate and international reserves.”

A copy of the agreement was provided by an Indonesian government official.

The Restructuring Agency, known as IBRA, already has seven banks under its control and is evaluating another 40 “unhealthy” ones. IBRA, whose mission is still evolving, will take a role similar to the Resolution Trust Corp. that handled the U.S. savings and loan cleanup.

For the first time, the IMF and Indonesia have come clean on how much had been lent by the government to keep sick banks operating in the last few months--$9.5 billion.

The agency will sell about $10 billion in bonds to Bank Indonesia to begin paying back those loans, the agreement said.

It’s also likely to issue another $8.8 billion in bonds this year at “market-related nominal interest rates” to increase the capital base of weak banks and repay their debts in an effort the IMF says will ultimately cost about 15% of the nation’s gross domestic product. The document did not say how these bonds would be issued or who would buy them.

“This is big money but it had to be done,” said Sofyan Djalil, an economic law professor at the University of Indonesia.

The agreement also says Indonesia will set up a special bankruptcy court to help settle claims. The absence of such courts has been a key issue slowing the cleanup of bad debt.

The expense of overhauling the banks and remedying the country’s other economic woes is expected to create a budget deficit equal to 3.5% of gross domestic product this year.

In order to make up for its revenue shortfall, the government agreed to sell part of its stake in its two already publicly traded phone companies.

Shares of more government-owned companies will also be sold this year.

The latest IMF agreement follows two failed efforts at reform dating back to October. Those packages failed to stop the dramatic slide in the rupiah--it has lost 70% of its value in the last year--and the government’s refusal to carry through on its promises eroded investor confidence.

The new accord aims specifically at regaining that confidence and stabilizing the rupiah.