IMF `wary' over new deal with Indonesia

INDONESIA agreed a new programme of emergency economic reforms with the International Monetary Fund (IMF) yesterday, but even before it was formally announced a senior IMF official expressed wariness about the Jakarta government's capacity to fulfil its promises.

"We have no assurance. We cannot have assurance, given history, that it will be done," Stanley Fischer, the IMF's first deputy managing director, said in Tokyo. "We have measures in place and if they are not implemented, the programme won't go ahead."

This will be the third time Jakarta has agreed to a set of reforms with the IMF, in return for financial assistance of more than $40bn (pounds 24bn) to restore its economy after the collapse of the Indonesian rupiah. The original deal, signed last November, was supplemented by another in January. In March, the two sides were in negotiations again after President Suharto said the programme violated Indonesia's constitution.

"The success of this agreement will be in the implementation, not in the signing," said Mr Fischer. "If the programme is not carried out we couldn't continue to disburse funds. It's not for us to go ahead `no matter what'."

The full details of the programme will be unveiled after its presentation to the IMF's executive board tomorrow but, IMF officials said, it will contain new measures for monitoring its implementation. Once the IMF's board has approved it, a balance of payments loan worth $3bn will be released.

In a retreat from its earlier position, the IMF has agreed to allow continuing subsidies of rice and soya beans, in response to Indonesian fears of social unrest caused by rising food prices. The price of fuel and electricity will be allowed to rise gradually and the government will stop granting monopoly privileges, a controversial practice which has greatly enriched members of President Suharto's family.

Meanwhile, the IMF added its voice to calls for large tax cuts in Japan, to stimulate domestic spending and thus revive the Japanese market for goods from struggling Asian economies. A fortnight ago, Japan announced the outlines of a 16 trillion yen stimulus package. Today Ryutaro Hashimoto, Japan's prime minister, is expected to convene a committee which will lay the ground for tax changes as part of that programme. "There is a good case for tax cuts, and they should be substantial, the greater part of any package," Mr Fischer said in Tokyo.

Mr Fischer's remarks come as Japan struggles to jump-start an economy that has seen consumer spending collapse after three tax hikes last year. Japanese business leaders, stock investors and now the IMF are calling for Mr Hashimoto to reconsider his commitment to slashing government spending.

If Japan does not get its economic house in order soon, its problems could worsen, and even stall a recovery in other Asian nations, Mr Fischer said.