By Paul Blustein
Washington Post Staff Writer
Wednesday, April 8, 1998; Page A18

The International Monetary Fund reached an agreement yesterday with Indonesia that allows the country's $43 billion international bailout to resume. But the IMF, wary of Indonesia's propensity to backslide on economic reforms, has added provisions intended to keep the government of President Suharto on a short leash.

The new accord, which Indonesian officials made public at a news conference in Jakarta early today, requires the government to take concrete actions before IMF funds are disbursed. That is because, in the view of U.S. and IMF officials, Suharto has broken pledges he made under two previous agreements to dismantle monopolies and cartels run by his relatives and cronies.

["We're following through on all of the commitments," Indonesia's top economics official, Ginandjar Kartasasmita, said at the Jakarta news conference, special correspondent Cindy Shiner reported. Ginandjar said the new deal addressed a host of thorny issues -- including ways of overcoming the nation's private sector debt of more than $70 billion, but he was adamant that his government would not attempt to underwrite any portion of that debt.]

The agreement also requires Indonesia to maintain high interest rates to suppress inflation, but it allows the government to spend considerably more than originally envisioned on public subsidies for food and energy -- a change necessitated by the spread of social discontent engendered by Indonesia's contracting economy.

Assuming formal approval by the board of the 182-nation IMF later this month, the pact would clear the way for Indonesia to receive billions of dollars in loans it desperately needs to import food, generate foreign trade and begin mending its economy. Those loans, which are being provided by a number of institutions contributing to the IMF-led bailout -- the World Bank, the Asian Development Bank and export-import banks of several major countries -- were frozen last month when the IMF suspended the rescue package on grounds of noncompliance.

Resuming the aid should ease the crisis atmosphere surrounding the world's fourth most-populous country. As long as the standoff between the IMF and the Suharto government persisted, Indonesia appeared to have no hope of regaining the confidence of investors or of obtaining the means to keep its 200 million people fed amid a severe drought. Even as it returns to the IMF's good graces, Indonesia faces a long, painful period of adjustment, with its once thriving economy shrinking and inflation rising.

The Indonesian currency, the rupiah, is trading nearly 70 percent below its value last summer vis a vis the U.S. dollar, which makes it very expensive for companies there to import raw materials, supplies and machinery. And foreign investors are leery of putting money back into the country, partly because of Suharto's spotty reform record and partly because of fears the country will be engulfed by social disorder. Riots over high food prices already have erupted in a number of towns.

"Most likely there will be a little rally in the rupiah because of this" agreement, said David Durrant, a currency analyst at New York-based I.D.E.A., an economic consulting firm. "But then the question is going to be, 'Is Indonesia actually doing what they said they're going to do?' "

Because such skepticism is prevalent in financial markets, the IMF has designed the new agreement to maintain greater leverage over the government than before. Instead of reviewing Indonesia's performance on a quarterly basis, as it does with most countries it lends money to, the IMF will conduct a monthly review, officials said, and disbursement of the $10 billion in loans that the monetary fund has committed will depend on the Suharto regime's fulfilling its promises.

"There will be a step-by-step assessment of how Indonesia is carrying out the program, and support from the IMF will be measured along with the steps being taken" by Indonesia, a U.S. official said.

The need for such monitoring was demonstrated yesterday when the government announced that a company controlled by Suharto's youngest son, Tommy, will open shops on government properties to sell personal hygiene items. That initiative appears to contravene the IMF's effort to reduce "crony capitalism" and open the country's distribution system to outsiders, but fund officials said they had not seen details of the enterprise and could not comment.