IMF positive on Indonesia review

IMF deputy director Anoop Singh speaks after meeting Indonesian economics minister Rizal Ramli

In this story: Soured relations over missed targets Weak rupiah, high interest rates Must resolve 'political gridlock' RELATED STORIES, SITES

JAKARTA, Indonesia -- The International Monetary Fund official heading a mission to Indonesia said on Wednesday he was optimistic of a positive outcome to a crucial review of the country's economic reforms.

"Yes. We had a very good meeting," International Monetary Fund deputy director for Asia & Pacific Anoop Singh said when asked if he was optimistic on the outcome.

Singh spoke after meeting top Indonesian government officials early on Wednesday.

He heads the 12-14 day mission, which will determine whether the country receives a $400 million loan delayed since December.

The loan has far-reaching implications for Indonesia, because it is needed to trigger part of a $5.8 billion debt rescheduling deal agreed last year with the Paris Club of official creditors.

Soured relations over missed targets

Singh gave little else away following the almost two-hour meeting, saying the review would be routine, covering all areas included in the previous IMF/Indonesia pact signed last September.

"If you look at the last LoI (letter of Intent) of September 7, this is a review of all those issues," he said.

"It is a normal review and like so many reviews before," he added.

Relations between Indonesia and the Fund have soured since previous reviews over a raft of missed economic targets and concerns over controversial changes to the central bank law.

The proposed law change would see the entire board of the bank sacked. Only last week Indonesia insisted it would stick to the plan, claiming it is necessary to make the bank more independent and accountable.

But IMF officials fear the amendment could open the central bank to political influence and threaten its independence.

Nonetheless, both sides have been upbeat about the mission's potential to resolve differences.

Weak rupiah, high interest rates

Indonesia's Finance Minister Prijadi Praptosuhardjo said on Tuesday he did not see any major hurdles for the review as all key requirements had been met.

Speaking after Wednesday's meeting, senior economics official Dipo Alam said the mission would also discuss Indonesia's gaping budget deficit, strained by the weak rupiah and high interest rates.

"Yes. It will be discussed in detail with the finance ministry," Alam told reporters when asked if the budget deficit would be on the IMF's agenda.

"We expect the IMF to focus more on its core functions such as financing policies and the economic recovery program," he added.

The IMF mission should give the ailing rupiah some relief and might help push interest rates down from their current almost 20-month highs.

But analysts said the rupiah is expected to move to at least 11,000 to 11,500 against the US dollar in the weeks ahead, though it probably would not decline to the record 16-17,000 rate it reached during the 1998 currency crisis.

Must resolve 'political gridlock'

But Indonesia would not see any progress on its economic woes, unless it first resolves the "political gridlock" besetting its government, a strategist said.

Dilip Shahani, senior fixed income strategist for HSBC, told CNN Indonesia must first settle its political problem before it can achieve economic progress.

"The legal system is still extremely weak," he said.

Shahani said the Indonesian Bank Restructuring Agency (IBRA) needs to move more quickly on asset sales, while the govenrment also must make some progress on corporate governance and bankruptcy issues.

The Indonesian government has already adopted an IMF-recommended debt-restructuring program to recover bad debts.

Jakarta is hoping the program will help it settle about $40 billion owed to the IBRA by companies that collapsed during the 1997-98 Asian financial crisis.

The IMF is also looking at Indonesia's fiscal decentralization program.

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