Louise Williams, Jakarta – Indonesia announced last night that it had reached agreement with the International Monetary Fund on a rescue package for its ailing economy.

Although no official figures were given, the package is believed to be worth about $US20 billion ($28 billion), which would force the closure of 17 banks, the removal of fuel subsidies and an end to most agricultural monopolies.

Announcing the agreement, the Finance Minister, Mr Mar'ie Muhammad, said economic growth would fall over the next two years, but the Government still anticipated growth of around 7 per cent in 1999-2000.

"The Government firmly believes this policy and program will be effective in restoring the health of the Indonesian economy so as to improve the welfare of the people and alleviate poverty," an official statement said. The Government aimed to reduce the current account deficit to less than 3 per cent of GDP within two years.

Earlier, Mr Mar'ie met President Soeharto in what analysts said was the final briefing on the IMF deal.

Speculation over the package brought confusion to the stock market, which suffered early losses on fears the economic reforms would not be sufficient, but shares rebounded later as investor sentiment over the IMF deal improved.

All negotiations have been in private, but economists and investors expected the IMF package to include loans of about $US20 billion, to provide a stand-by fund which would allow the Soeharto Government to defend its currency and gradually ease the tight monetary policy which has been hurting business.

Indonesia's corporate sector is struggling to manage $US60 billion of foreign debt, following the 35 per cent devaluation of the rupiah over the past three months. In an attempt to prevent a further fall in the currency, the Government has sharply increased interest rates, leading to a credit squeeze. In exchange for the IMF funds, the Soeharto Government is believed to have agreed to phase out fuel subsidies, a sensitive move which will increase prices across the board and could spark public opposition at a time when the financial crisis and drought are forcing millions out of work.

The package is also expected to include an end to the clove monopoly controlled by Mr Soeharto's son, Hutomo "Tommy" Mandala Putra, as well as the wheat monopoly which benefits the President's close friend, Mr Liem Sioe Liong, and his daughter Siti "Tutut" Hardiyanti Rukmana.

But it is understood Indonesia's most politically sensitive staple food, rice, will continue to be government-controlled.

Some observers said the controversial national car project, which gives tax and tariff concessions to a company controlled by Tommy Soeharto, would not be cancelled but that he would take a less prominent role in the project.

Most observers said the IMF package would include a list of banks to be closed. Indonesia has over 230 banks, now operating with problem loans of close to 12 per cent of their assets, and economists have long argued there must be a shake-out in the financial sector.

Australian loan dependent on Jakarta raiding its own reserves

Although the details have not been spelt out, there appears to be a significant difference in the terms under which Australia lent $US1 billion to Thailand and the promised loan, probably of another $US1 billion, to Indonesia. If anything, the money we stump up for Indonesia should be even more secure than the money we have provided to Thailand.

In the case of Thailand, we had to put our money up-front. Our $US1 billion went into a $US17 billion kitty, along with $US4 billion from the International Monetary Fund. Our money is being drawn down in proportion to the IMF money, one dollar from Australia for every four dollars from the IMF.

In the case of Indonesia, it seems, Jakarta will have to first work through most of its own reserves, which stand at $US20 billion, then move on to the core money provided by the IMF. Only when those funds are depleted, sources say, will Jakarta be able to draw on money put up by countries like Australia.

In neither South-East Asian country will Australia face any foreign exchange risk. Under the terms hammered out, each borrower promises to return our $US1 billion in US dollars, plus interest.

But we do have to stump up real money and we do face a possible credit risk, even if it is to extremely credit-worthy customers, especially in the case of Indonesia.

IMF teams are believed to have discovered that the Indonesian Government has about $US5 billion squirrelled away in the Indonesian banking system, over and above the $US20 billion in reserves. This additional sum will have to be drawn down before our money is touched.