Indonesia, IMF Agree on Tough Fiscal Plan

The International Monetary Fund and Indonesia agreed today on a much-strengthened economic restructuring plan for the economically troubled nation, setting the stage for a hoped-for stabilization of financial markets here and throughout Asia.

The approval was announced by IMF Managing Director Michel Camdessus after talks with President Suharto on Wednesday night and this morning.

At a news conference early today, Camdessus called the revised program “bold and far-reaching, addressing all of the critical problem areas of the economy and deserving the full support of the international community.”

“I am confident that, if this program is implemented with the determination and commitment that I myself have seen over the past two days, Indonesia should be able to soon begin to overcome its economic crisis,” he said.

The sweeping new program, worked out in marathon negotiations between IMF and Indonesian officials this week, marked an end to the latest crisis in the seven-month Asian financial debacle, which has brought economic collapse to many of the Asian “tigers” once considered model economies.

Financial markets in Asia were mixed today after having rebounded for much of the week after Suharto agreed to comply with IMF demands.

But analysts cautioned that the accord only puts the overall Asian rescue program back on the track it was on before the latest crisis in Indonesia erupted three weeks ago; it does not guarantee that the stability will last, even if the reforms are put in place.

In an effort to regain confidence of financial markets, many of the accord’s key components are tougher than those in an IMF agreement that Indonesia signed in October, while others have been eased a bit to reduce the pain to firms and workers.

For example, Indonesia’s plans to postpone expensive infrastructure projects, phase out state-supported monopolies, reduce government fuel subsidies, overhaul the country’s banking structure and reduce its trade barriers all have been strengthened or speeded up.

In another unusual step designed to show Indonesia’s determination to adhere to the IMF program, the government’s “letter of intent”--its formal promise to the IMF to carry out policy reforms--was signed by Suharto rather than by his finance minister, as is usual.

Suharto also went on nationwide television early today to announce the new program and urge Indonesians to support it.

The IMF agreed to settle for more gradual efforts to bring Indonesia’s budget into line and reduce expensive government fuel subsidies. Indonesian officials had complained that both previous prescriptions would have been too painful politically.

Today’s accord capped a week of intense international pressure by the United States and other major industrial countries to convince Suharto that he must go ahead with IMF-required economic reforms or risk seeing his currency devalued further and his country’s stock market in tatters.

President Clinton, fearful that continued turmoil in Indonesia would spread to other Asian economies, such as South Korea, had dispatched a high-level mission headed by Deputy Treasury Secretary Lawrence H. Summers to help prod Suharto into accepting the IMF reforms. Summers’ delegation won Suharto’s agreement Tuesday to comply with the IMF reforms, then headed on a whirlwind tour of six other Asian countries. The group was en route to Beijing today when the IMF agreement with Indonesia was announced.

Analysts said that in some ways, Suharto had little choice but to go along with the IMF. His earlier indications that he intended to ignore the previous accord sent the currency, the rupiah, reeling on the foreign exchange markets and threatened to plunge Indonesia into economic collapse.

Although Indonesia now, again, will be eligible for loans under an IMF-arranged, $43-billion rescue package, officials said the fund does not plan to speed any disbursements. The next installment is due to be sent in early March. U.S. and IMF officials have contended that Indonesia does not need speedier IMF lending, as South Korea did earlier this month, because it has sufficient foreign exchange reserves to cover any expected obligations. Indonesia’s reserves now total about $22 billion.

The IMF prescriptions also are expected to mean hardship for businesses and ordinary households throughout Asia, at least in the short run, as countries encounter widespread bankruptcies that almost inevitably will lead to layoffs, higher interest rates and new inflation.

But most analysts believe that the Asian countries will emerge from their restructuring better positioned to function in the global economy. The difficulty is, most are likely to experience only sluggish economic growth for the next two or three years.

Although economists say the economic slump in Asia will not have enough effect on the United States to bring on a recession, U.S. officials have been worried that a continuation of turmoil could spread and eventually result in a worldwide slowdown. That could produce political unrest in Asia, rekindling historic ethnic strife in some countries and possibly threatening budding democracies. Some already affected countries, like South Korea, are strategic to the United States.

The turmoil began when global financial markets began to realize that many of the rapidly growing Asian countries were plagued with insolvent banks that had been allowed to make dubious loans under the region’s all but unregulated banking systems. Investors quickly withdrew their money.

Despite its similarities to the October accord, the program announced today was much stronger, plugging ambiguities and loopholes that might have let the Indonesians fudge on key commitments. Analysts said if the current plan is carried out, it would result in a wholesale transformation of Indonesia’s economy, moving it from that of a developing country toward a more modern--and viable--economic structure.

Camdessus also dismissed reports that quoted an IMF staff report that laid some blame for the collapse of Indonesia’s banking system earlier this month on the agency’s insistence that the country raise domestic interest rates--to stem capital flight--at the same time that it was closing banks.

Among the major elements of the new accord:

* Suharto still must scrap plans he announced last week for a 26% increase in government spending. But, in recognition of Indonesia’s weakened economy, it no longer will be required to run a budget surplus of 1% of its annual output; it will be permitted a 1% deficit instead. It was Suharto’s surprise spending plan--which would have abrogated the October accord--that convinced financial markets that Indonesia had abandoned any intent to meet IMF prescriptions and set off the latest turmoil.

* Indonesia will speed its plans to break up government-subsidized agricultural cartels and manufacturing arrangements, pledging to dismantle them by Feb. 1 instead of phasing them out over several years, as the previous agreement would have permitted. The list also will be expanded. This step is symbolic because one cartel--which grows and markets cloves--is owned by Suharto’s son Hutomo Mandala Putra, also known as Tommy. The others include cement, plywood, manila, wheat, wheat flour, soybeans, garlic and cooking oil. The IMF regards them as too costly. Only the rice cartel will remain.

* Suharto has agreed to cancel 12 of 15 costly government-financed infrastructure projects that primarily benefit members of his family and some close political allies. Under the previous accord, the projects were to have been phased out. But in a Nov. 1 surprise, Suharto exempted them from any shutdown, contributing to mounting fears that he was about to ignore the IMF program.

* The government will end all financial preferences by May for two highly visible pet projects championed by Suharto political cronies--a national aircraft manufacturing project planned by B.J. Habibie, minister of research and technology, and a national automobile company.

* The previous agreement with the IMF called for Indonesia to begin reducing its government subsidies for fuel--a move that would have resulted in a quadrupling of gas prices and much pain for corporations and average Indonesians. Under the new accord, the government will phase out its fuel subsidies more gradually but eventually will eliminate them. The process is to begin as soon as the rupiah can be stabilized.

* The government will expedite its schedule for overhauling its dysfunctional banking system, identifying and closing insolvent banks, selling off others to stronger financial institutions and strengthening government regulation of the financial sector. IMF and U.S. authorities have blamed the weak financial structure for much of the turmoil. Cozy relationships between government and banking often prodded banks into making questionable loans that have left them insolvent.

* Indonesia will let all interest rates be determined by market forces rather than by the government--including those charged by state banks, which had used government subsidies to keep interest rates artificially low.

* The government will slash tariffs on many goods to 5%, beginning next month, and will end all restrictions on exports and provide financing for entrepreneurs who want to ship goods overseas.

* Suharto has agreed to create a fully independent central bank--modeled somewhat after the U.S. Federal Reserve Board--by April 1. The previous accord had only hinted at such an action in the future. He also will create a high-level economic policy coordinating committee that will include someone designated by the IMF as a member.

And he will immediately place the special “reforestation fund” that he created earlier this year--which outside analysts say is essentially a government slush fund--into the budget, where it can be scrutinized by IMF monitors.

* BLAMING ASIA: Although many U.S. companies truly are being pinched by the Asian crisis, some appear to be using it as a scapegoat. D1