RTTNews - The International Monetary Fund recommended Indonesia to continue its stimulus package and to follow a 'cautious' monetary policy stance.

The fund welcomed Indonesia's fiscal stimulus plan for 2009, underscoring timely and efficient implementation of the spending program. The Washington-based agency urged the nation to maintain some of the stimulus measures next year. A fiscal stimulus package of around 1.4% of GDP was announced in February 2009.

The Executive Board of IMF noted that private consumption supported by the fiscal stimulus package helped to maintain positive economic growth. However, another round of global risk aversion could adversely affect the nation's external liquidity, demand and growth prospects. To withstand these risks, authorities should strive to achieve the appropriate policy mix and promptly adjust it as required to preserve macroeconomic and financial stability.

The board assessed that the current level of the real effective exchange rate was broadly in line with fundamentals and that reserves are at a comfortable level. Some directors indicated that the current level of reserves and the various contingency arrangements should provide an adequate cushion. Members shared the view that the flexible exchange rate served well as an external shock absorber.

The fund also recommended strengthening tax administration and lowering energy subsidies as this could create fiscal space for priority infrastructure and social expenditure. Directors commended the authorities for the progress in fiscal reforms toward a consolidated Treasury Single Account, simplified budget execution procedures, and strengthened cash management, the IMF added.

Regarding inflation, the fund said, Strong commitment to the medium-term inflation targets, as well as publication of inflation forecasts, would help guide inflation expectations and enhance policy credibility. The Bank Indonesia reduced the interest rate by 275 basis points since December 2008.

The agency supported a more cautious monetary policy stance, given ample liquidity in the banking system, long lags in monetary transmission and the risk of a reversal of capital flows. Members urged Indonesia to continue to strengthen the monetary policy framework.

The fund assessed that the crisis management steps taken by the Bank Indonesia aided to relieve liquidity pressures and restore market confidence. Further, they emphasized the need for strengthening the early warning systems and of continued close supervision of banks.

Earlier in June, the IMF had raised its growth outlook for the Indonesian economy to 3%-4% this year from 2.5% expansion predicted initially.

Yesterday, Indonesian Vice President-designate Boediono said the government is aiming for a growth of 7% in the next five years. Speaking in Singapore, he said the economy is expected to grow 4% this year and may expand 5% in 2010.

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