INTERIM CGI MEETING REVIEWS RECENT DEVELOPMENT

JAKARTA, January 25, 1999 — More than 80 representatives of the CGI (Consultative Group on Indonesia) donor countries and institutions met today in Jakarta to review the performance of the reform program in Indonesia and assess the impacts of international assistance. The World Bank, which chairs the CGI, held today’s meeting as a mid-year follow-up, as agreed to during the last CGI Meeting in Paris in July 1998. The meeting focused on the emerging picture of the crisis’ social impact, progress made in key reform areas such as banking and corporate restructuring, updates on the fiscal and financing situations, and information exchange about ongoing donor programs in Indonesia.

Jean-Michel Severino, Vice President of East Asia and the Pacific region, opened the session by giving his assessment of the current state of the region. "Although we are seeing signs of stabilization emerging here, as well as across the region," he cautioned, "we must not forget that we are in a fragile stage of the crisis, and that the first signs of economic recovery are just starting and that the full social impact of the crisis has not yet completely emerged. The only insurance East Asia countries have against further financial shocks is to continue to boldly implement agendas of reform in governance and corruption, and financial and corporate restructuring, while taking care to protect the poor and vulnerable through social expenditures and improved social policy." Mr. Severino concluded his opening statement by stating that the crisis has impacted the capacity of the Government of Indonesia, and that donor countries need to stay engaged to help mitigate the worst impacts of the crisis.

The government’s representative, Minister Boediono, State Minister for Development Planning/Chairman of BAPPENAS, stated that it is gratifying to know that Indonesia has many friends in these times of trial. "In summary, I think our economic policies are working…and they are working because we have been clear and consistent in our policy stance, and also because we have received solid support from the international community, especially the CGI members," said Dr. Boediono.

Nevertheless, he added, the year 1999 will remain critical, not because of the threat of famine or hyperinflation, but because of the potentially explosive interaction between economic, social, and political developments if the cards are not played right. "I am happy to note, however, that sitting on the sidelines has not been the position of the CGI," said Dr. Boediono. "With your assistance we believe we have won some important battles and thus far have succeeded in alleviating human suffering and in avoiding a potentially frightening human tragedy."

The meeting was also attended by Dr. Emil Salim, Chairman of the Community Recovery Program, and Mr. Mar’ie Muhammad, Chairman of the Commission to Monitor the Social Safety Net Programs.

The meeting reviewed a preliminary study commissioned by the World Bank on the social impacts of the crisis. The study, which summarized a number of independent reports, suggests that the social impacts of Indonesia’s crisis, while serious, have been less dramatic than earlier reports suggested. Rather than the universal devastation in poverty, employment, education, and health so widely predicted and repeated in the media, new data reporting on conditions as of the fall of 1998 reveal a more complex and heterogeneous picture.

"Not surprisingly, given the genesis of the financial and economic crisis in the formal sector, people in urban areas are hurting more than those in the rural areas," said Lant Pritchett, who helped summarize the findings. "People on Java appear to have bearing the brunt of the crisis, both in comparison to more isolated islands with less linkage to the formal, modern economy, or islands with export commodities."

The new data also show that pre-crisis economic status or poverty rates are not a good indicator of how much any given region or household has been affected by the crisis. While some of the poor are doing worse, others appear to be better-off, and it appears that members of the newly-emerging urban middle classes are hit the worst of all. This new data has important implications for policy makers in designing and adjusting programs aimed at minimizing the effects of the crisis on the poor and vulnerable. However, because the study is still very preliminary, and uses data which is also preliminary, the study is not at this time ready for distribution.

The meeting also viewed the status of implementation of the government’s social safety net programs, including the padat karya and rice distribution schemes. The World Bank concluded that the new data, combined with the past year experience in the management of the social programs, highlight the need for improved targeting of social programs and for improved governance in their management. Accelerated disbursement is needed to alleviate the impact of the crisis on the poorest, it was agreed, but should only take place if solutions were found to management issues and progress was made on transparency.

During the meeting, the World Bank also updated the group on the progress made on financial sector reform and its focus on bank recapitalization, restructuring, and supervision. The total cost of recapitalization is estimated at about a third of GDP, or approximately US$35-40 billion - 20 percent of this is expected from the private investors, and 80 percent to be paid by the government, most probably by issuing sovereign bonds. Over the long-term, the banking reform program includes developing corporate governance at state-owned banks, empowering IBRA (Indonesia Bank Restructuring Agency), strengthening the bank supervision function at Bank Indonesia, further developing capital markets and laws supporting creditors’ rights, privatizing newly nationalized banks and state-owned banks, and introducing traditional deposit insurance protection programs. Progress made on corporate restructuring was also reviewed, including progress made under the Jakarta Initiative Task Force (JITF), where some 90 companies have now registered with the Corporate Restructuring Program.

The Bank stressed that both corporate and financial restructuring were long procedures, and that international experience has shown that even under the "best of circumstances", these programs take substantial time. Nevertheless, the group called for accelerated implementation of the program, especially speeding the build-up of transparent and healthy institutions.

Finally, the macroeconomic situation was reviewed, with assistance from the IMF. The 99/00 budget calls for support from the international community equal to about US$5 billion. While the meeting had no pledging objective, the group recognized the need for strong support from the donor community and international financial institutions. The large amounts required can be gathered only if a strong and realistic reform program is being implemented by the Government of Indonesia in a framework of sound macroeconomic policy, the chair of the CGI concluded, while thanking the government for its openness and congratulating the group for the excellent spirit of partnership they showed during the devastating course of the crisis.