No memorandums have been signed, no handshakes photographed. But after a bitter face-off over what prescription is right for Indonesia's beleaguered economy, Jakarta and the International Monetary Fund seem to have stopped colliding and started cooperating. As five committees hammer out the details of a new (and third) deal between the two, hostility on both sides has dissipated since the Fund last month withheld a second, $3 billion tranche of the $43 billion bailout it arranged for Indonesia. The scheduled arrival of IMF Deputy Managing Director Stanley Fischer in Jakarta on April 2 has spurred talk that a new deal is imminent. So which side blinked?

Make that both sides. The IMF signaled it will tolerate delays on some suggested reforms – Indonesia is likely to be allowed to keep subsidies on fuel for the time being, for example. Jakarta for its part sped up its privatization program and backed away from radical, market-shocking measures to lasso the rupiah. What led to the compromises? Maybe a dose of reality. The IMF and the international community do not want to risk social turmoil and political uncertainty in Indonesia by demanding overly stringent reforms. And President Suharto knows Indonesia cannot dig its way out of its economic hole without the financial credibility the IMF can give. Economist Steve Hanke, whose plan to peg the rupiah to the dollar got the IMF's dander up, says he thinks Suharto still favors the idea. "But if something came up that was better he'd go with that – better from a political point of view," he told Asiaweek.

The most important result so far of the new cooperation is an emerging consensus on how to deal with Indonesia's $74 billion in private-sector foreign debt. Jakarta's proposal, which the IMF agrees has merit, is modeled on a program adopted by Mexico in the 1980s to get over its debt crisis. Under the plan, an indebted company pays its obligations in rupiah into a state fund, which then pays the company's creditors in foreign currency. Payments go toward interest in the first few years and capital later. The companies pay off their own debts – no bailout for the profligate – and the government shoulders only the foreign exchange risk.

But setting up the mechanism is not easy. First, the facility needs an estimated $10 billion to $15 billion of capital to work. Finding the money will be tough. Second is an even touchier subject: who should benefit. "You have to sort out who you want to help," says M. Sadli, an economist and former mines and energy minister. That is, should the facility be open to everybody, even companies that squandered money building golf courses or are stonewalling creditors? Or should it be limited to struggling exporters and salvagable firms working to restructure their debts?

Despite the uncertainty still surrounding the debt plan, news of progress in the IMF-Indonesia relationship refreshed the rupiah, which rose above 9,000 to the dollar for the first time since January. (The climb was also helped by higher interest rates which make rupiah bank deposits pay up to 47.5% annually.) A deal may now emerge in days. IMF Asia-Pacific Director Hubert Neiss, leading the Fund's team in Jakarta, said the committee on monetary policy has reached a reasonable conclusion. The other four committees – on banks, the budget, structural reforms and private sector debt – are also said to have made progress. Enough progress? "We want to have no loose ends," says Neiss. "We want to be sure all areas under discussion are completely covered and only then will we say we are finished."

But a new deal with the IMF only bandages Indonesia's financial injuries – it will not by itself heal the wounds from years of poor planning and bad investments. Economic consultant Hartojo Wignjowijoto points out that many apartments and office towers remain half-empty and modern factories lie idle. "The rate of utilization is low, and that's called waste," he says. Whatever debt relief package is implemented, local corporations may have to struggle for years to meet payments on white elephant investments. "What Indonesia is really going to have to do is raise interest rates, cut government spending, and have one to two years of suffering," says an economist who lived in Mexico during its devaluation crisis. Rates have gone up, but suffering is something Suharto, for his own political survival, does not wish to inflict on his people. Finding agreement with the IMF may turn out to be easy – compared to steering Indonesia through the coming year.

[By Jonathan Sprague and Jose Manuel Tesoro/Jakarta]

Give and take

The IMF:

Backed Jakarta's proposal to solve Indonesia's private debt problems

May tolerate continued subsidies for food and fuel

May allow food distribution monopoly to remain

Canceled a 5% tax on foreign ex-change purchases

Backed away from currency board proposal to peg the rupiah

Proposed to sell off 12 state-owned companies