Jakarta - Indonesia's growth prospects have improved "a little bit" as a result of the remarkable improvement in its macroeconomic fundamentals, Hubert Neiss, the top Asia-Pacific official at the International Monetary Fund (IMF), said yesterday.
Neiss, who is leading an IMF review of Indonesia's economic programme this week, said after meeting President BJ Habibie that interest rates would fall steadily in the weeks ahead.
Analysts said reducing rates would go some way to relieve pressure on the country's banks.
"It's high time for interest rates to come down again because of the bullish trend in the rupiah," Neiss said
"Based on good macroeconomic developments, Indonesian growth prospects are expected to rise a bit," Neiss said. He also said the rupiah would to continue to strengthen, adding he didn't have precise forecasts for either.
The Indonesian government and the IMF have predicted growth to remain flat or contract slightly this fiscal year to March 31 2000.
Habibie said yesterday he was optimistic that interest rates would fall to single digits in the near future if economic conditions continued to improve.
The rupiah was quoted at 8 100 rupiah to the dollar at 0812 GMT yesterday, having gained ground in the last few days despite the fact that Bank Indonesia had been guiding interest rates lower at its weekly note auctions.
Neiss said the IMF and Indonesia's government were still discussing how the state banks could recover debt from their 20 largest debtors. The IMF will set targets and deadlines and agree on methods of recovering the debt during the week's review.
"The most important thing is how Indonesia will make the debtors return the money," Neiss said. "The IMF and Indonesian government haven't yet finished the discussions on terms of how they deal with largest debtors."
In its most recent letter of intent, signed with the IMF in March, the government said it would step up efforts to push the corporate debt restructuring process along. State banks were instructed to take their 20 biggest recalcitrant debtors to bankruptcy court by the end of April if the debtors had not negotiated.
Neiss has said the IMF review should lead to the release of some $1 billion in loans for Indonesia from the IMF and Japan's Miyazawa fund before the country's elections in June.
High interest rates since the economic crisis hit Indonesia have resulted in banks offering higher deposit rates than lending rates, leading to a substantial negative spread.
If rates continue to decline, as predicted by the government and the IMF, this negative spread situation would disappear. It would also reduce the interest cost borne by the government to recapitalise troubled banks.