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Indonesia takes steps to avoid economic crises

Reuters - September 3, 1997

K.T. Arasu, Jakarta – Indonesia unveiled a package of measures on Wednesday to prevent the world's fourth most populous country from plunging into financial crisis amid regional currency turbulence.

'To prevent the currency turmoil from leading to an economic crisis, Indonesia needs to take credible pro-active measures that will anticipate future problems," Finance Minister Mar'ie Muhammad told a news conference.

Measures ranged from steps to boost the stock market to a review in state budgets and projects.

Mar'ie scrapped limits on foreign purchases of new shares in a bid to restore life to the stock market, which has dropped 30 percent since early August.

'In order to stimulate the stock market, the 49 percent limitation for foreign investors to buy IPO (initial public offering) shares...will be abolished," he said.

He said tight liquidity in the money market would be eased prudently, over time, with interest rates being reduced gradually.

He said the rupiah currency was still fluctuating because of regional and global pressures.

'However, with God's blessings, market confidence in the rupiah has started to show positive signs," he said.

Unlike other currencies, the depreciation of the Indonesian rupiah did not exhaust national foreign exchange reserves, he said, adding the recent free-float of the currency was aimed at countering speculation against it.

'The main objective is to place the rupiah in solid footing towards its new equilibrium," he said, adding the central bank would intervene in the foreign exchange market if necessary.

He gave no preferred trading range for the rupiah.

The rupiah has depreciated some 30 percent since January following fierce offshore attacks on the currency and a rush by local companies to hedge their foreign borrowings.

Mar'ie said government expenditure would be slashed to compensate for declining revenues due to a slowdown in business, in order to prevent the budget running into the red.

'Government domestic revenue, in particular net tax revenue, will experience a substantial reduction. Government expenditure will have to be adjusted to compensate for declining revenues so that a budget deficit can be avoided.

'As a consequence of a smaller budget, some government projects will have to be postponed or rescheduled," he said, adding that details would be worked out by relevant ministers.

He said the private sector, which had powered the country's steady growth over the past decade, had also to set priorities for its projects and select those which could be postponed.

'Efforts to increase exports should be considered as a first priority," he said, adding the government would take concrete steps to boost exports.

He said the government would continue with its economic deregulation, and import tariff reduction.

Measures would be implemented to eliminate constraints in economic activity and causes of what he called "the high cost economy."

Mar'ie said that in a bid to slow growth of imports, sales taxes on products not considered essential for development or public needs would be raised. He gave no details.

He said all state projects including those which were not part of the current budget would be reviewed, especially those with high import content.

He said the government would assist solvent banks that faced temporary liquidity problems, adding: "Banks that are not solvent will be encouraged to merge with solvent banks or should be acquired by solvent banks."

If this failed to materialise, insolvent banks would be liquidated, he added.