Paris – Indonesia took another step on its long road to recovery on Wednesday when it agreed to reschedule $4.2 billion in foreign debt and received a new endorsement of its economic reforms from the IMF. The debt deal agreed with the Paris Club, part of an International Monetary Fund backed bailout programme, should relieve pressure on Indonesia's battered rupiah by boosting the government's finances in the short term.

Creditors agreed to reschedule $4.2 billion in payments due up to March 2000 under the deal, the Paris Club said. Indonesia's economy is still a wreck, with output expected to fall about 15 percent this year, but officials in Paris said on Wednesday there was some light on the horizon.

"Output is falling, inflation is high, the exchange rate is over-depreciated, unemployment is high, IMF director for the Asia-Pacific region Hubert Neiss said. "However the policies the government has agreed to put in place are making progress and the (IMF) programme, which is monitored monthly, is fully on track," he said.

This meant the IMF would be able to pay on time the next $1 billion tranche, due shortly, in the IMF bail-out, bringing total payments to $7 billion.

Analysts said the rescheduling deal with the Paris Club would help the world's perception of Indonesia and could lead to a return of foreign capital in the medium term. "This is probably just another factor that is going to put us back on the road to recovery further down the line," Standard Chartered Economist Mitul Kotecha told Reuters Television.

Since its crisis started in mid-1997, Indonesia has imposed a tight monetary policy matched with an expansionary budget, a policy mix meant to curb inflation while subsidising basic needs and preparing the way for an economic recovery.

But that rebound is only partly in Jakarta's hands. "We expect a recovery next year. How pronounced the turnaround becomes depends on factors outside of Indonesia's control such as the economic situation in neighbouring countries and how strong Japan's recovery is," he said.

Indonesia's top economics minister Ginandjar Kartasasmita said he expected the economy to improve next year but that growth would not return until 2000. "In 1999 the situation will improve. If we can get zero growth, we will be making substantial progress from the current 15 percent negative growth," he said. Ginandjar said the Indonesian currency was gaining strength as predicted. The Indonesian budget assumes a rupiah/dollar exchange rate of 10,000 by the end of the year. "We are well on the way, and we hope we can break through the 10,000 mark," he said. The rupiah was at 10,950 per dollar on Wednesday.

Paris Club chairman Francis Mayer said this week's debt relief deal would help Indonesia return to economic growth. The Paris Club deal rescheduled payments due until March 2000 on a total $52 billion debt owed by the Indonesian government and state companies to official creditors.

Export credits were rescheduled for 11 years with three years' grace, while soft loans were rescheduled over 20 years with five years' grace. For legal reasons, Japan opted to provide some $2 billion in new money instead of following the traditional rescheduling process. It will receive the debt repayments on time, but match these with new money offered on the same terms.

Ginandjar also said Jakarta would soon start talks on the rescheduling of official debt owed to commercial banks. The deal will cover payments totalling $263 million due up to March 2000, on Indonesian government and public sector debt to commercial banks of $1.8 billion. These deals however leave unresolved the treatment of a further $80 billion owed by private sector companies. Indonesia's total external debt, owed by public and private bodies to official and private creditors is $134 billion.