Comments Before the Local Donor Mee by Drs. Kwik Kian Gie

CommentsBeforethe LocalDonorMee
by
Drs. Kwik Kian Gie
coordinatingMinisterfor theEconomy,FinanceandIndustry
Republicof Indonesia
Ladies and Gentlemen,
It is a great pleasure for me to meet with you - as the local representativesof the
CGI members - for the first time here in Jakarta. We have a lot to do together and I am
counting on your continued support.
As you know, we are currently in the midst of our discussionswith the IMF on the
letter of intent for a new three-year program that we hope to sign in January when the
budget is submittedto Parliament. We fully expectthat the commitmentsexpressedin the
LOI will be acceptedby the Executive Directors of the Fund at their meeting in January
and that this will result in the releaseof the next tranche of financing from the IMF later
that month.
When Indonesia'snew governmenttook office just two monthsago,it inheritedan
enonnousnumber of problems from the past. Not leastof theseis the fact that our economy is still mired in a deep recession,with real income levels for most of the population
well below levels two years ago. Much of the private businesssectoris effectively bankrupt, our financial system is still dysfunctional,and the statebudget is deeply in deficit.
Complex issuesof regional authority must be worked out. Social and political grievances
due to past repressionmust be resolvedand ethnic and religious harmony strengthened.
All of these problems are urgent and require immediate attention, but the capacity of our
new political systemto respondto thesetaskshas not yet beenfully tested.
Developing a sound economicprogramthat will place Indonesiawell on the road
to recovery is perhapsthe greatestinitial test for the new Government. In developingour
program we are working with all parts of civil society and with the international community. We are also seekinggreatersupportand involvementfrom our legislativebranchof
governmentand we recently met with CommissionIX of the DPR to discussthe policies
that are embodied in the letter of intent. Never before has the Governmentinvolved the
l5 December
1999
DPR in advancein the developmentof its positionstakenwith the IMF. We will continue
this involvement of the legislaturein our discussionsin the future.
In preparing our economic program, we have been guided by four principles:
First, to strengthenthe institutions of society and government. Second,to guaranteemacroeconomic stability. Third, to reinvigorate the banking sector while promoting the restructuring of corporate debt and the corporate sector. And fourth, to protect the natural
resourcesand the environmentof the nation.
Governance issues lie at the heart of our reform effort. We are committed to taking significant steps toward strengtheningthe institutions of government and society. A
key commitment in this area is our effort to reform the civil service. The World Bank has
performed a comprehensivereview of civil serviceissuesthat will assistus greatly
in our
efforts' While comprehensivecivil servicereform is a long-termprocess,we are taking
a
number of initial steps to improve the efficiency of public administration and reduce corruption. In this regard we have establishedthe commissionthat will overseethat implementation of our anticomrption laws and have set up a special group within the Attorney
General's office to investigateand prosecutecomrption in the legal system. At the
same
time, we will be taking stepsin the next budgetto begin the processof raising civil
servant's wages to more reasonablelevels. However, we understandthat pay reform
is not
an end in and of itself. Instead, it must be part of a long-term program to reinvigorate
public administration. A fundamental step in this processwill be to open
up a public discussion- a national dialogue,if you will - on the issueof governmentservice
to the public.
Significant stepshave already been taken in the effort to improve public administration. One of the first acts of the new governmentwas to fully disclose
the Bank Bali
case. We are taking actions to resolve this caseand to ensurethat anyone
found to have
violated the law is brought to court in an expeditious manner. We
have also begun the
processof exposinghigh level political collusion in other cases,
suchas in the grantingof
loans from state banks. This is a first critical step in cleaning up the
managementof state
banks and ensuring that in the future loans are given on the basis of sound
commercial
principles rather than on the basisof political connections.
These efforts can only succeedifthey are supportedby a thorough reform
ofthe
legal system and the judiciary. Tough anti-corruptionlegislation
has been passedand
-2-
l5 December
1999
measuresput in place to ensure that our courts have the will and capacity to implement
theselaws. However, we must recognizethat the problem of comrption is deeplyrooted.
It cannot be eliminated overnight, although we expectto make rapid progressnow that the
main political obstaclesto reform have beenovercome.
At the same time we are committed to implementing the processof decentralization which will bring the governmentcloserto the people. Decentralizationis an essential
antidoteto Indonesia'slong history of excessivecentralauthority,as well as being aprerequisite for future social and political stability. In developingour decentralizationplans
we will work closely with the GovernancePartnershipProgramproposedby the LINDP
and the World Bank. We also recognize that decentralizationmust be implementedwith
great care to ensure that growing regional autonomy does not result in fragmentation.
Although the problems that we face are great, Indonesia has a fifty year history of national unity. During that time we have repeatedlydemonstratedthat our resolveto remain
togetherexceedsany tendencytoward disunity.
In addition to addressingthe needsof public institutions,we also are focusingour
efforts on encowaging the reform of the private sector. These efforts are focusedprimarily in three areas: Reforming and restructuring the banking system,promoting the resolution of the corporate debt problem, and promoting improved corporategovernance.
In the area of banking reform, we are committedto completingthe reorganization
and recapitalizationof all of the statebanksby June2000. At the sametime, we plan to
have completed the reorgarization and consolidation of the BTO and BBO banks by
Septemberof next year. Following reorganizationand recapitalization,we will move
forward with a vigorous program to privatize the banking system. One of the unfortunate
consequencesof the financial sector restructuring program has been that the government
has ended up owning most of Indonesia'sbanking sector. This can only be a temporary
solution. Past experiencehas shown that the governmentis not a competentmanagerof
banks. This can be seen from the fact that state banks account for more than one-half of
the cost of restructuring the banking system even though they accounted for only onethird of bank assetsprior to the crisis. It can also be seenfrom the fact that IBRA expects
to recover only 4o/oof the value of non-performingloans transferredto it by statebanks.
The poor performance of state banks is related to the highly politicized nature of their
lending practices,with loanstoo often being given on the basisof connectionsratherthan
-J-
l5 December
1999
on the basis of sound commercial principles. Given this record, prlatization of state
banks and BTO banks is a prerequisitefor creatinga healthyfinancial system. We expect
to begin the privatization processby selling part of the Government'sstake in BCA by
February 2000. We will then proceedwith majority divestmentof key state banks and
BTO banks.
Another important area of focus in the banking sector is the operation of the bank
restructuring agency. IBRA is the key to containing the net cost of the financial sector
restructuringprogram. It is impossibleto fully cover the commitmentsthat we have made
with respectto IBRA in theseshort remarks. However, I would like to highlight several
points. First, we expectto fully resolveall inter-bankclaimsby the end of the year. Second, we are putting in place a processthat will ensurethat IBRA's accountsare carefully
audited on a regular basis and that those accountsare made public. Third, we are preparing clear and transparentguidelines for IBRA to apply in consideringrequestsfor reschedulingsand haircuts for debts in its portfolio, while recognizingthat all proposals
tnust be reviewed on an individual basis. This should facilitatethe processof corporate
debt restructuringin caseswhere IBRA is involved. Fourth,IBRA is beginningto use its
extraordinary powers to bring uncooperativedebtorsto court. We hope that this will encourage all debtors to be more forthcoming in the future. Finally, IBRA is committed to
the orderly but rapid sale of the assetsunder its control, basedon our recognitionthat it is
critical that the productive assetsof the nation be returnedto the private sectoras quickly
as possible. We are actively seekinginternationalparticipationin all of our assetsales.
Although we are pursuing an Indonesiafirst policy for assetsales,this policy only applies
when an equivalent bid has been made by an Indonesianfirm.
Ladies and Gentlemen.
Indonesiacurrently faces some difficult fiscal
Our bank recapitalization
programwill require grossinterestpaymentsamountingto some4Voof GDP, absorbing
more than l}Yo of the central government's budget next year. While privatization proceedsand cash recovery on bank assetscould potentially cover almost half of this extra
cost, this still leavesa very large sum to be financedfrom generalrevenuesor from external borrowing. Other demandson the budget are also mounting. Wagesto public servants need to be sharply increasedas one step toward creatinga more professionalcivil
l5 December
1999
service with high standardsof integrity. Rising energy prices have greatly inflated subsidies and although prices to consumerswill be adjusted,economic realities will force us to
make this adjustment gradually. Regional autonomy, if not properly implemented,could
causea loss of central government revenuenot commensuratewith adjustedfiscal responsibilities. Despite encouragingsigns of economicrecovery,growth will remain low next
year, hence a major increase in domestic non-oil revenue cannot be anticipated. We
therefore expect the overall deficit to be around 5% of GDP, half of which will be financedby receipts from privatization and assetsalesand half from external borrowing.
Unfortunately, public borrowing has already risen to a very high level over the
past two years, with the public-debt-to GDP ratio increasingfrom less than 25%;otoaround
100%. Most of this increasehas been due to growing domestic debt arising from the bank
restructuring process, but external debt has also increased. This large increasein public
debt imposes a significant burden on future generations. A top priority of the government
will therefore be to reduce the public debt-to-GDP ratio in coming years,both by limiting
expenditure growth and by improving our ability to raise revenuedomestically.
In the immediate term debt reduction is not possible becausea fiscal stimulus is
needed to promote economic recovery. Given this need, there are certain advantagesto
foreign borrowing. For example, interest rates are lower on official foreign debt than on
domestic debt, foreign borrowing does not crowd out domestic investment, and foreign
borrowing supports the balance of payments, thereby helping to strengthenthe rupiah.
However, foreign borrowing also entails greaterrisk, particularly if the exchangerate depreciates in the future. As long as the economy remains weak it will be necessaryto sup,
plement domestic revenue with international support but as the recovery gains momentum
we expect to continue the process of paying off the nation's foreign debt that was interrupted by the crisis.
While continued foreign borrowing cannot be avoided, we want to make certain
that all funds are used productively. In the past, too large a share of official assistance
was wasted, either through poor design and implementationor through malfeasance. One
way to reduce wastage is to increasetransparencyin the budget and to involve civil society in the monitoring of projects and programs. We welcome suggestionsand assistance
from the international community in improving our efforts in this direction.
-5-
l5 December
1999
Of course,enhancingour domesticrevenuebasemust be a key componentof our
efforts to maintain fiscal integrity and to limit the growth of public debt. This requires
that we broaden the tax base, particularly by raising the share of income tax revenue to
GDP. We will also eliminate unnecessarytax exemptions. In pursuing this objective,
however, we must recognize that economic recovery will not be sustainablewithout
strong export growth and that exporters cannot competeon world markets without access
to inputs at world market prices. Efforts to eliminate tax exemptionsmust therefore not
impinge on the accessof export firms to competitively priced inputs for export production.
Sound fiscal managementmust be supportedby good macroeconomicpolicies,
Although great progresshas been achievedover the past year, major problems remain.
The bank restructuring process is well advancedbut few banks have resumed lending to
the real economy. The biggest obstacleto a resumptionof credit flows to the private
sectoris the enormousoverhangof corporatedebt. We are committedto an acceleration
of the debt workout process. However, we will maintain the position that private debt
should not be turned into public debt. This also applies to state-ownedenterprisedebt.
We will uphold sovereign guaranteeswhere they were given but not in caseswhere the
initial loan clearly did not have sovereignbacking.
There are other obstaclesto a resumptionof credit flows to the real economy,including high real interest rates. In 1998, when short-termnominal interest rates were
raised to 70o/o,inflation had been running at an annualizedrate of |2}%during the first
half of the year, so real interest rates at that time were strongly negative. By contrast,
over the past nine months we have experienceddeflation. The CPI is now 4Yolower than
it was in February. With short-termnominal interestrates stuck at around 13% for the
past tbur months, real interestratestoday are far higher than they were prior to the crisis
and are the highest in the region. For economic recovery to take root, the trend toward
lower interest rates seen recently should be strengthened,in the context of exchangerate
and price stability.
Sound economic policies must be supportedby a stablesocial environmentand a
healthy natural environment. We intend to significantly inuease spending on social
safety net programs in the coming fiscal year and to overcome the bureaucratic bottlenecks to the realization of past programs. Monitoring provisions and other safeguards
-6-
l5 December
1999
have been developed to prevent abuseand ensureimplementation, including frequent reporting on key performance indicators, independentverification and close involvement by
civil society. We also intend to arrest the decline in Indonesia'snatural environment,
which has continuedto deteriorateduring the crisis. Particularemphasiswill be placedon
protecting marine resourcesand forest resources. This will include greater decentralization in the managementof natural resources,with local communitiesbeing given more
say and a greater stake in decisions affecting our natural resources. We also plan to improve environmental monitoring and to move toward a pricing structure for natural resourcesthat better reflects their true value. The proposedhigh-level forestrymeetingthis
coming January is a key element of our overall strategyin this area.
Finally, let me say a few words on externalassistance.The next CGI meeting is
scheduled to be held in Jakarta for the first time, in February of next year. Given the
budget outlook described earlier, we will still need significant budget support for the
coming fiscal year. Much of this can be financedby commitmentsalreadymade. While
there is likely to be a small residualgap, I am pleasedto note that initial contacrssuggest
this will be coveredby the World Bank, the Asian DevelopmentBank and Japan. Therefore. in February, I would hope we can focus our attention on how to use the available
resourceswell, including better targeting of funds on priority areasand measuresto reduce corruption and waste.
Ladies and Gentlemen,
I hope that my brief comments here today have made clear the deep commitment
of the new government to thoroughgoing economic reform and restructuring. We look
forward to working together with the international community in putting the vision outlined here into practice.
Thank you.
1
l5 December
1999