BANKING DEVELOPMENT

The cost to December 1999 of the banking restructuring process had reached Rp 540 trillion in the form of government bonds. In 2000, additional government bonds amounting to Rp 120.2 trillion would be issued.

Up to December 1999, loan-restructuring realization increased, especially in government banks. In the meantime, loan restructuring in private banks appeared to be on hold.

Non-performing loans of banks have declined due to the shifting of some loans to the Indonesian Bank Restructuring Agency (IBRA) and the positive results of loan restructuring since July 1999. Further restructuring would take effect after October.

MAIN STRUCTURAL REFORMS

Fiscal reform

The fiscal reform agenda has been implemented. Consistent with the approved budget, Parliament is expected to approve the amendment to the Value Added Tax (VAT) Law. Other tax reforms, such as the provision of tax privileges for the Integrated Economic Development Zones (KAPETs), rationalization of import tariffs on capital goods and the imposition of a flat 5 percent duty on exempted goods, have been implemented.

In line with fiscal reform, the government commits itself to delivering greater fiscal transparency, improving treasury management procedures, consolidating the number of bank accounts of government agencies, and ensuring consistency between monetary and fiscal data.

Preparations for implementing fiscal decentralization in 2001 will be guided by some key principles. The key principles are: (1) revenue transfer to sub-national governments shall be consistent with responsibilities, (2) expenditure responsibilities shall be developed in graduating fashion in keeping with the capacities of the sub-national governments, and (3) specific mechanisms shall be developed to ensure that any borrowing by sub-national governments shall be kept within strict limits. The recently established Regional Autonomy Advisory Council (RAAC) and the Coordinating Team are leading the process.

Banking System Reform

Regarding governance of the banking system, several improvements have been made including, among others:

• The IBRA has concluded its evaluation of all outstanding interbank claims under the guarantee scheme. Settlements have now been taking place in all cases, except for very small claims under litigation. The IBRA and Bank Indonesia are implementing plans to ensure that banks whose claims were ineligible remain adequately capitalized.
  
  
• A new governance and oversight framework for the IBRA is being developed with the assistance of an international consulting firm, and in collaboration with the World Bank. This new governance framework for the IBRA, including an independent governing body, was established at the end of June 2000.
  
  
• In improving its transparency, the IBRA has commenced regular publication of its activities, by way of monthly reports on: sales and collection activities, progress in loan restructuring and disposal of industrial assets; and quarterly financial reports by the BTO banks. In June 2000, the IBRA published the audit report of its end-1999 accounts, with the assistance of an international accountancy firm. The IBRA also issued its first comprehensive annual report during the third quarter.
  
  
• To coordinate the government¡¯s response to uncooperative debtors and former bank shareholders, a new body¡the Committee for Resolving the Cases of Recalcitrant Debtors¡was established at the end of May.

Regarding the supervisory and regulatory framework, Bank Indonesia is implementing a comprehensive master plan to upgrade bank supervision and comply with international regulatory norms by end-2001, assisted by international experts. The master plan will focus on improving the quality and timeliness of offsite reporting the data of all banks, and on making operational a program of special surveillance for systemically important and problem banks. Bank Indonesia will also upgrade its regulatory framework. On March 30, Bank Indonesia issued a decree concerning the setting out of the conditions under which it will transfer banks to the IBRA.

Furthermore, to strengthen the regulatory and the governance structure of the pension and insurance industries, finance companies, and the capital markets, reform on the nonbank financial institution is on the agenda. These reforms are being designed with assistance from the Asian Development Bank (ADB).

With regard to the Bank Indonesia audit, said bank has been implementing in a timely way measures aimed at addressing the issues raised by the Supreme Audit Board (BPK) report to Parliament on December 31, 1999 and clarifying Bank Indonesia¡¯s financial position, as outlined in the January MEFP. At end-June 2000, Bank Indonesia published an audited statement of its financial accounts for end-1999. Over the coming months, in consultation with the BPK, it will take steps to address remaining audit issues, including the full divestment of financial subsidiaries, as well as the aggressive strengthening of management information systems, financial and operational controls, and accounting policies to reflect best practices. A due diligence of all Bank Indonesia¡¯s subsidiaries will be completed by June 2000 ahead of their planned disposition, which was to be substantially completed by end-2000.

With regard to bond market reform, Indonesia has begun the development of a domestic bond market by making an initial share (10 percent) of the bonds issued for bank recapitalization eligible for trading. A debt management office (DMO) will coordinate future bond issues and the development of a debt management strategy in consultation with Bank Indonesia. The government will also submit to the Parliament a draft law on debt management that will ensure automatic appropriations of debt-service payments for all government bonds issued.