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Indonesia and IMF sign new agreement

President Megawati Sukarnoputri is due to announce the new budget to parliament on September 7th  

By CNN's Atika Shubert in Jakarta

JAKARTA, Indonesia -- After a week of tough negotiations, Indonesian officials and an IMF team have signed a new letter of intent, outlining targets in order to resume disbursement of a $5 billion loan to the cash strapped country.

The agreement will allow the IMF to clear a $400 million installment that was suspended last December over Indonesia's failure to follow through on economic reforms.

With a new government in place, however, IMF officials are optimistic that Indonesia's economic team would honor their reform commitments.

"We believe the government's letter and the government's program is well focused on core areas to sustain Indonesia's economic recovery." IMF Asia Pacific Deputy Director Anoop Singh told reporters in Jakarta.

New Targets Set

At a glance: Indonesia

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The new letter of intent includes the following targets: growth for 2001 is targeted at 3 - 3 %, with inflation in the 9 - 11% range; base money growth will be reduced to 12 % by March 2002 and 2001 budget deficit of 3.7% of GDP.

The agreement also commits the Indonesian government to a revision of the Central Banking Law in order to assure greater independence and accountability.

The IMF has also mandated greater transparency of the Indonesian Bank Restructuring Agency and speeding up the sale of state assets.

The agreement specifically mentions selling 51% of Indonesia's largest bank, Bank Central Asia. Indonesian officials are confident these goals will be achieved.

"We are committed to Mr. Anoop Singh's statement of accelerating the sales of the Indonesian Bank Restructuring Agency and other state assets. This must be carried out." Minister for State Enterprises, Laksamana Sukardi told reporters. "There are no pressures being applied here, only national interests. Hopefully, with this agreement our old problems will be resolved."

Agreement Crucial for Debt Relief

International Monetary Fund
The IMF's Anoop Singh believes the government will honor its reform commitments  

The letter of intent is crucial for Indonesia to begin rescheduling more than $70 billion in debt to international creditors.

On September 10, the Paris Club of international creditors to Indonesia will meet to discuss options for rolling over the debt.

Indonesia has more than $132 billion in public debt, nearly 100% of GDP. Most of it was used to pay for a massive bank restructuring program that has, thus far, failed to fully repair the country's tattered banking sector. More than half is owed to international creditors.

Indonesian officials are confident that once international confidence is regained, the economy will rapidly improve.

Confidence Key to Recovery

"So much of the problem is actually perception. The 90% is perception. Then what is the next 10%? Maybe real work." Chief Economics Minister Dorodjatun Kuntjoro-Jakti told CNN. "The psychology is very important."

The next challenge for Indonesia's economic team will be putting the IMF goals into effect, first by pushing the 2002 budget through parliament.

Indonesia's new President Megawati Sukarnoputri is due to announce the new budget to parliament on September 7th.

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