Jakarta – Indonesia should sort out its legal system and aim to reduce fuel subsidies to free up spending for other areas, but it has been doing well in fiscal policy and financial-sector reform, the IMF said yesterday.
Mr Stephen Schwartz, the International Monetary Fund's top representative in Indonesia, said the government had been slicing away at its debt load and the central bank had done a good job of implementing a prudent monetary policy.
"The government has made very substantial progress in financial-sector reforms," he told Reuters. But he said to attract the new investment that would boost growth significantly, President Susilo Bambang Yudhoyono's administration should act in other areas.
He said: "To reach the 6 or 7 per cent growth that would cut poverty and boost jobs, the government needs to follow through on pledges in such areas as reforming the legal system." Indonesia's courts have been criticised for corruption and inconsistency in rulings, scaring away investors.
Mr Schwartz praised the new government for its emphasis on cutting unemployment and poverty and fighting corruption.
"Expectations in the market and among the population are very high and so there's a real need to deliver to meet those expectations," he said.
On the fiscal side, he said cuts in state spending on energy subsidies could provide needed funds for social programmes and development.
The subsidies are a sensitive issue and while Dr Yudhoyono has said he wants them cut, he has been coy about when and how.
"I would say it should be high on the list of things to do for the new government. But again, it's up to the government to choose the appropriate time," Mr Schwartz said.
His carefully worded advice contrasts sharply with the heavy-handed approach Indonesian critics say the IMF took in the late 1990s. Back then, critics said the IMF effectively dictated economic policy in exchange for putting together a US$43 billion rescue package for the country.
Some IMF policies were attacked as doing more harm than good and sparking unrest and violence. Indonesia did not ask for an extension of the IMF programme when it ran out at the end of last year.
Indonesia was hit hard by the Asian financial crisis and is still struggling to recover. The government's external debt alone was US$79 billion as of July. Mr Schwartz said Jakarta was whittling away at the problem.
"We, however, are very confident of the government's ability to continue servicing its debts," he said, noting the overall debt to gross domestic product level has been cut from over 100 per cent in 2001 to less than 70 per cent.