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Government urged to send signals to restore public confidence

Jakarta Post - December 11, 1997

Jakarta – The World Bank country director for Indonesia, Dennis de Tray, suggested yesterday that the government send signals to the market that it would undertake reform measures to restore public confidence.

De Tray said he was optimistic the country's monetary crisis would ease shortly provided the government stuck to its promised reform programs.

Once the government sent strong, clear signals to the market that they would undertake reform measures, the situation should ease, he said.

"In the medium-term, there is great hope for optimism. But we need to get through the short-term and we need to do that quickly," de Tray said at a business luncheon hosted by the Indonesia-Australia Business Council.

"It needs to signal to the people and to the world in a transparent way.

"I think the signal that the market is sending is that the government should implement a broad package. This is very important to restore domestic confidence, " he said.

Unlike Thailand, de Tray said, Indonesia's monetary crisis was very much driven by domestic forces rather than by offshore players.

Indonesia has been badly hurt by the regional financial crisis which broke out following the devaluation of the Thai baht in early July.

The Indonesian rupiah fell to a historic low of 4,600 against the U.S. dollar Tuesday, down over 50 percent since the beginning of the year, and the stock market index traded last week at a four-year low.

Indonesia asked the International Monetary Fund the World Bank and the Asian Development Bank for help in October and received a bail-out package of US$23 billion. Bilateral agreements also were made to supplement the package.

De Tray said the government should now move from its short-term measures to long-term ones by addressing all problems outside the finance sector, including the public sector, to satisfy market expectations.

"The interest rate route is very good, but it is short term. It needs to be accompanied by long-term reforms outside the finance sector," he said.

If the government blended its short-term measures with long-term ones correctly, de Tray said he was confident that Indonesia would come out of the crisis very soon.

"There is a very strong sense that this is a short-term financial crisis that needs to work its way out of the system," de Tray said.

"After that, there is every reason to believe that Indonesia can return to high growth, substantial foreign investment and a real increase in the incomes of the Indonesian people," he said.

De Tray said the government needed to take very transparent decisions in terms of public resources spending, including in financing foreign exchange-consuming strategic industries.

He warned that Indonesia needed to be very careful in moving toward high capital and high technology costs as it had proved to be dangerous in the past in many other developing countries.

"We argue that state-owned enterprises, including strategic industries, need a very good handle. So when they make a decision on them, they should do it very transparently, so there's no second guessing," he told journalists after the luncheon.

"And the public has the right to know what the future is," he said.