March 27, 2003
1. This supplement provides an update on economic and policy developments since the staff report was issued on March 18, 2003. The staff appraisal remains valid.
2. Financial markets remain resilient in the face of hostilities in Iraq. The rupiah has continued to trade in a narrow range and, after a modest decline last week, has strengthened back to below Rp 9,000 per U.S. dollar. Central bank intervention has been small, and the end-March target for NIR should be met with a margin. Equity prices have also remained stable.
3. The staff’s growth forecast for 2003 (3½ percent) remains unchanged. However, the outlook is subject to increased uncertainty and will depend on the reaction of consumer and investor sentiment to both world events and domestic developments. Recent macroeconomic indicators are broadly positive. The decline in tourist arrivals has been less than anticipated, with arrivals in January down 9 percent from the previous year (although arrivals in Bali were down 28 percent). Foreign investment approvals for the first two months of 2003 were $2.3 billion, up sharply from $1.0 billion in the same period last year.
4. IBRA continues to make progress on its 2003 asset recovery program. Notably, on March 21 IBRA announced that three bidders for Bank Danamon (one foreign-led and two local consortia) had been shortlisted. Final bids are due in mid-April, with the winning bid expected to be announced shortly thereafter.
5. With respect to the safeguards process, discussions have continued with the authorities on steps to strengthen BI’s external audit mechanism. In particular, the staff is continuing to encourage the involvement of an independent accounting firm in BI’s external audit mechanism for its 2002 financial accounts. The involvement of such a firm in the review of BI’s foreign exchange reserves at end-2002 identified a series of control weaknesses, as well as data discrepancies that gave rise to an upward revision to NIR and a change in the reporting methodology of NIR data to the Fund. BI’s auditor, the Supreme Audit Agency, acknowledges the need for further capacity building, but has indicated a preference to work with other state audit agencies, which it believes have relevant expertise, rather than to engage an independent firm. The staff believes that the involvement of an independent firm is necessary at the present time to provide assurances of the quality of BI’s financial statements. The staff will maintain a dialogue with the authorities on this issue, with a view to achieving a solution consistent with the Fund’s safeguards policy, and will provide an update at the next review.