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Tuesday, January 27, 1998 Published at 05:09 GMT

image: [ BBC Correspondent: Jonathan Head ]Jonathan Head

The Indonesian government has announced a sweeping new reform programme to try to restore confidence in the country's ailing banks. Many of the banks are believed to be close to collapse because of bad loans. Under the new plan the government is setting up an independent supervisory body which will, if necessary, take over private banks and either force them to merge or liquidate them. The government has also proposed a temporary moratorium on servicing debts held by some Indonesian companies. The move was welcomed by the financial markets, with the Indonesian currency rising in value against the US dollar. Our Jakarta correspondent, Jonathan Head, reports:

The weakness of Indonesia's banks has been cited by investors as one of the main obstacles to an economic recovery. Now the government says it will assess all the banks and take full responsibility for restructuring or liquidating those found to be unhealthy.

Acknowledging that the public had lost faith in the banking system, Indonesia's finance minister, Mar'ie Muhammed, promised to guarantee all the deposits and loans of the banks. According to a team from the International Monetary Fund, which is helping draft the economic reforms, that could cost the government up to 12 % of gross domestic product.

To try to minimise the cost foreign investors are being allowed to buy into Indonesian banks for the first time. A new independent agency has been formed to carry out the restructuring of the banking sector.

The authorities are also promising to regulate the way in which the banks borrow and lend money more strictly in future. The Indonesian government is now moving fast to implement the reforms agreed with the IMF earlier this month, but it has yet to address the problem of the billions of dollars of debt owed by Indonesian companies.

With the massive devaluation of the Indonesian currency, most of those companies cannot repay their loans. The suggestion by the government that there be a temporary moratorium on repayments still leaves creditors in the dark over when they might be able to recover some of their money.

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