Indonesia Consultative Group Meeting |
| Statement by Prijadi Praptosuhardjo Minister of Finance Republic of Indonesia to the Meeting of the Consultative Group on Indonesia (CGI) Tokyo, Japan 17 October 2000 Your Excellency, Chairman of the CGI, Mr. Jemal-ud-din-Kassum, Vice President of the World Bank, Your Excellencies from CGI Delegations Ladies and Gentlemen, It is a great honor and pleasure for me to address this honorable audience for my first CGI meeting, pertaining to the State of the Indonesian economy and status of the structural reforms, which have been undertaken to accelerate the pace of its recovery. As our Co-ordinating Minister stressed in his opening address, the new economic team in the Government has continued to intensify efforts made by the preceding team, to restore economic growth and recovery. At this opportunity, I would like to underline the commitment of the Government towards pursuing its close collaboration with the International community, multilateral agencies, such as the International Monetary Fund (IMF), the World Bank, the Asian Development Bank (ADB), among others, and with the donor community. STATE OF THE ECONOMY Our country is at a crucial stage in its recovery. We are certainly encouraged by tangible positive signs, but our economy has not yet fully be recovered, its pre-crisis equilibrium and areas of vulnerability will still be a source of concern to our government. Much has been done already but more remains to be done, and there is still a long road ahead of us. On the macro-economic front, the situation has improved since late 1999. The key objectives of the macro-economic framework for 2000 are within reach, and we expect that GDP for this year will exceed our original target of 3.8% for 2000. In our budget for 2001, we are targeting a growth rate of 4.5%, which is evidence of our confidence in the sustainability of our economic recovery. At this juncture, I would like to stress, in addition to the steady progression of our growth rate, that our recovery has benefited a large proportion of the population. The number of people living in poverty has declined since last year, and we believe that this trend will strengthen in the coming months. Domestic price stability has been restored. Inflation remain contained despite a pick up in recent months which reflects the effects of the exchange rate depreciation and administered prices increasing. From January to September 2000, the inflation rate was kept low, and the interest rate of one-month Bank Indonesia certificates (SBI) of deposit, has been brought gradually down. Although we are confident in the recovery of the economy, we are aware that there are areas of weakness. Private capital continues to flow out, and the pace of asset disposal and banking and corporate debt restructuring, needs to speed up. As a result, the rupiah remains undervalued, despite strong export growth and moderate economic activities. Its current levels are also related to political events, and we believe it reflects the feelings of the market perception in regards to the country's economic recovery. Market sentiment at the moment remains fragile. Restoring the confidence of the international community in our economy, is the one of the greatest challenges of our government. We are fully aware that much needs to be done in this regard. We believe the present assembly of donors is a crucial element to restore and comfort the confidence of foreign investors. Ladies and Gentlemen, Let me add a few words about our budget for 2001 and our medium term fiscal objectives. The budget for 2001 has been designed to address current economic issues. A major element of our general fiscal policy strategy is to first, increase tax and non-tax revenues, second, manage more effectively and improve public expenditure efficiently, third, reduce subsidies, fourth, implement fiscal decentralization and fifth, decrease dependency on foreign financing sources. Total revenues will increase from around 17% of GDP in 2001 to 19% by 2003. Along with this, public expenditures should be managed more effectively and efficiently. Tax revenues are equal to 11.1% of GDP for the 2000 budget and 12.3% in 2001 and it is expected to achieve around 16% of GDP in 2004. We believe we have room to maneuver in regards to tax revenues, as our tax to GDP ratio is below international and regional standards. The improvement in the tax yield is also expected to be realized through a broadening of the tax base together with improvements in tax administration and collections. The balance of public expenditure should improve from 21% in 2001 to 19.2% by 2003. This would enable us to achieve a budget deficit target of 3.7% of GDP in 2001, and will be expected to reach a surplus budget in 2004. The contribution of domestic financing of the budget deficit will increase from around 61% of total financing needed in 2001 to 100% in 2003, through privatization and asset recovery initiatives. We plan to reduce the government debt to GDP ratio currently standing at about 100%, to less than 60% of GDP by 2004. STATUS OF STRUCTURAL REFORMS The new Memorandum of Economic and Financial policies issued after the completion of the Second review by the IMF, approved by the IMF Board on 14 September, summarizes clearly the structural reforms that we are currently implementing. Our reform program is at a crucial stage and we are determined to make a success of it. The new economic team remain committed to the structural reforms outlined in our Letter of Intent (LOI) as agreed with the IMF. To clarify the focus of the economic program, the Coordinating Minister has also established guidelines explicitly stating our economic priorities. The crisis has revealed the areas of weaknesses in our economy, which are most in need of reform. Our Government must urgently address two of them in particular; the banking system and financial sector, and the debt arrears of the private corporate sector. The financial sector has not yet recovered from the trauma of the crisis and accordingly, banks are still extremely cautious to risk averse, concentrating on their capital adequacy ratio and preferring to invest in SBI's, rather than in new loans to the private sector. On the positive side, however, lending has began to resume to real sector. The re-capitalisation of the banking sector through the issuing of re-capitalisation bonds has been completed. The main problem facing the banking sector remains the issue of non-performing loans. There has, however, been an improvement as non-performing loans have declined to 29% of total loans to July this year. We targeted a banking sector level of non-performing loans for 2001 of approximately 5%. We believe that this target is achievable through the acceleration and restructuring overall loan portfolio. The cost to re-capitalize bonds will represent a heavy burden for the budget over the years to come. The repayment profile to re-capitalize these bonds is concentrated around the years 2004 to 2008. To facilitate the absorption of this cost by our economy, the Government would like to start issuing bonds, which would make it possible to gradually refinance the re- capitalization bonds. This would allow us not only to redefine the repayment profile, but also to satisfy the existing demand for Government paper and provide a benchmark for the corporate debt market. A Debt Management Unit (DMU) which will be authorized to issue and manage both internal and external government debt, has been established within the Ministry of Finance. The restructuring of the debt ax-rears in the corporate sector represents the utmost priority for our economic team. Asset recovery and debt restructuring are the core structural challenges for sustainable growth of our economy over the medium-term. Efforts have been made to intensify the sale of assets. Up to September 2000, total loans managed by the Indonesian Banking Restructuring Agency or IBRA is 268 trillion rupiah, while IBRA's claim to former banks' shareholders, is 113 trillion rupiah. The recapitalization of private banks amounted to 131 trillion rupiah and non core assets amounted to a book value of 8 trillion rupiah. For fiscal year 2000, the target set for IBRA is to raise Rp. 18.9 trillion partially offsetting the Rp. 38 trillion in interest charges from the re-capitalisation bonds. From the beginning of April to the end of September, IBRA has already raised gross proceeds of Rp. 12 trillion. In the 2001 budget, IBRA is expected to generate proceeds of approximately Rp. 27 trillion (see the chart). To accelerate the pace of corporate restructuring, the Jakarta Initiative Task Force (JITF) and IBRA have been working in collaboration. Legal action against non-co-operative debtors has proven to be an effective tool to recover some of the non-performing loans. The Jakarta Initiative Task Force has facilitated the restructuring of 26 corporate debts worth US$ 5.2 billion as of the end of September and targets another US$ 3 to US$ 5 billion before the years end for a total of US$ 10 billion. These measures of expediting the sale of IBRA-held assets, creating a market for domestic government debt, as well as renewing the commitment to privatize state-owned enterprises and reducing government subsidies, have been taken specifically to ensure fiscal sustainability. Although the Government and IBRA are committed to pursue the program of asset disposal, we believe in proper preparation and market timing, to maximize the return or minimize losses to the state. Our objective is to optimize proceeds from disposals and continue our non-discriminatory approach of debt restructuring programs of large corporates, to ensure that the Government does not incur losses. Besides focusing on the problems of the banking system and of our corporations, the Government is adamant that our economic policies must give greater weight to the needs of rural communities and immediate poverty alleviation. I would like to stress that this should not be considered as a change in our economic policies, but rather as a refocusing of our priorities. Another major challenge facing the Government is the need for fiscal decentralization. There have been many discussions about this argument within the economic team to ensure that economic stability should not be jeopardized during the fiscal decentralization process. This is the reason why we are planning to implement decentralization in a gradual way starting in the beginning of 2001. The goal is to transfer authority to the local government in a fiscally responsible way and preserve the territorial integrity of the Republic while preserving economic stability and the quality of public service. We also intend to link the transfer of resources to the transfer of responsibilities to guarantee a smooth implementation while maintaining the sustainable fiscal decentralization. In response to widespread demands for political decentralization, the government of Indonesia enacted Law no. 22 of 1999 on Regional Government Administration and Law no. 25 of 1999 on Financial Balance between Central and Regional Government. These two laws stipulate an increase in the regional sharing of general government spending. Estimates suggest that when decentralization is implemented, the region will spend about eight to nine percent to GDP, or more than double of what they are spending now. This fiscal decentralization should equalize fiscal capacity between central and local regions as well as across the country, based on the need of objective indicators. We consider that the decentralization process is a great opportunity to involve local communities in their development, and will in turn improve the welfare of the nation. The government is now focusing its efforts on containing the risks of decentralization. We have designed a proper strategy, which is essential to devolve the responsibility and administration in an orderly way. Agreement with the regions on such a strategy has been and will be continuously reached through RAAC (the Regional Autonomy Advisory Council), an important consultative body that was recently become operational. Finally, let me conclude by expressing our gratitude and appreciation for the strong support of the international community in helping us implement our economic program. We are confident that with your continued support which is more than ever necessary, we will be able to embark on a more sustainable recovery path and in turn we shall emerge from the crisis stronger than we were before. Mr. Chairman, Ladies and Gentlemen, thank you for your attention. |