IMF and RI need closer rapport<\/p>\n
By Colm Kearney<\/p>\n
The Indonesian government's proposal for a currency board to
\nstabilize the rupiah has been misunderstood, and it has invoked
\ninappropriate responses from the International Monetary Fund. The
\nfund should raise its game by being more sensitive to Indonesia's
\nsequencing of its reforms. The Indonesian government could more
\neffectively reassure the international community of its
\ncommitment to real sector reform.<\/p>\n
SYDNEY (JP): One of the key issues in economic and financial
\nreform is the sequencing of the reforms that is, which should
\ncome first. This is a very complex issue. Financial reform is
\neasier and quicker to implement than real reform. This does not
\nimply, however, that foreign exchange market deregulation and
\nfloating the currency should precede real sector reform.<\/p>\n
There are many dangers inherent in the implementation of ill-
\nthought-through programs of economic and financial reforms.
\nIndeed, the sequencing of the reforms can be almost as important
\nas their content particularly during the adjustment phase. The
\nIMF should be aware of this.<\/p>\n
For example, the Australian government embarked upon a
\nsubstantial program of financial deregulation in the early 1980s
\nwhich included freeing up interest rate setting, allowing foreign
\nbanks to enter the onshore retail market, and floating the
\nAustralia dollar on the foreign exchange market. This financial
\nderegulation preceded and outpaced real sector reform. The
\neffects of this sequencing lead to a burgeoning current account
\ndeficit and a build-up in the country's net foreign indebtedness.<\/p>\n
This came to a head in the late 1980's when the government was
\nforced to slow down the pace of economic activity in order to
\ncontrol the current account deficit. This contributed to the
\nworst recession since the 1930's, accompanied by very high
\nunemployment rates. It is important to understand that although
\nthis reform sequencing was not the only cause of Australia's
\nrecession, which was worldwide in nature, it did contributed to
\nits depth. It is also important to note that Australia now enjoys
\nthe benefits of its sweeping financial and economic reforms.<\/p>\n
The IMF has recently demonstrated partial awareness of these
\nissues. It has acknowledged that real sector reform takes time,
\nand that sequencing is important. In his address to the Annual
\nMeeting of the Bretton Wood's Committee on Feb. 13, in
\nWashington, The IMF Managing Director, Camdessus, described the
\nmeasures which will be needed to alleviate the current economic
\ndownturn in Asia. He said: \"Taken together, these reforms will
\nrequire a vast change in domestic business practices, corporate
\nculture and government behavior. Of course, all of this will take
\ntime\".<\/p>\n
Later on in this speech, he also recognized the desirability
\nof implementing \"a prudent and properly sequenced
\nliberalization\". In making the latter remark, however, he was
\nreferring exclusively to capital account liberalization rather
\nthan to the broader menu of both financial and real sector
\nreforms.<\/p>\n
Given that he was talking about how the current economic
\ndownturn in Asia might influence the IMF's future activities, his
\nhandling of the sequencing issue was insensitive to the
\ncomplexities involved in sequencing the substantial financial and
\nreal sector reforms that are on the Indonesian agenda.<\/p>\n
The Indonesian government's proposal for a currency board (CB)
\nshould be seen as a genuine attempt to buy time on the financial
\nreform agenda while it gets on with implementing the much-needed
\nreal sector reforms. The proposal's strength lies in its
\nrecognition of the need to secure a workable sequencing of the
\nfinancial and real reforms. This aspect of the proposal makes
\nperfect sense. The IMF's Indonesian Program did not succeed in
\nstabilizing the rupiah, and the Indonesian government is well
\naware that a stable rupiah is necessary in order to facilitate
\nthe real sector reform agenda.<\/p>\n
The CB proposal's weaknesses, however, are twofold. First,
\nits practical application carries significant risk of failure
\nwhich would further damage the rupiah and prolong Indonesia's
\neconomic hardships. Second, and more importantly, it gives
\nconflicting signals to the international community about the
\ngovernment's resolve to get on with the much-needed real sector
\nreforms.<\/p>\n
The issue here is one of credibility rather than intent. The
\nIndonesian government could more effectively reassure the
\ninternational community of its commitment to implementing the
\nmuch-needed real sector reform.<\/p>\n
The IMF has not responded helpfully to the Indonesian
\ngovernment's proposal to stabilize the rupiah. It has
\ndemonstrated insensitivity to the plight of the Indonesian people
\nand the genuine attempts of its government to stabilize the
\nexchange rate in response to a battering from the international
\nfinancial markets. It has evidently interpreted the CB proposal
\nin a negative light as an attempt to postpone the much-needed
\nreal sector reforms.<\/p>\n
What is the evidence for this? First, the IMF's First Deputy
\nManaging Director, Stanley Fischer, is reported in The Jakarta
\nPost of Feb. 14, as having criticized the CB proposal and having
\nused uncharacteristically blunt language about political issues
\nwhen he remarked that the rupiah had been hit by suggestions that
\nthe country could select a vice president whose \"devotion to new
\nways of doing things is limited\".<\/p>\n
Second, the leaked letter from the IMF to the Indonesian
\ngovernment threatened to withhold disbursements of the $43
\nbillion loan package if the CB proposal was pursued. The evidence
\nis entirely consistent with the interpretation that the IMF has
\nattempted to exert political pressure on the Indonesian
\ngovernment to sequence its financial and economic reforms
\naccording to the IMF's own preferences. This is inappropriate and
\nunhelpful for a number of reasons.<\/p>\n
First, it is neither a polite nor a productive way of doing
\nbusiness.<\/p>\n
Second, it does not lie comfortably with the stated purposes
\nof the organization (which can be read on its home page at
\nhttp:\/\/www.imf.org\/external\/index.htm) which include:
\nArticle 1 (iii): \"To promote exchange stability\", and
\nArticle 1 (v): \"To give confidence to members by making the
\ngeneral resources of the Fund temporarily available to them under
\nadequate safeguards, thus providing them with opportunity to
\ncorrect maladjustments in their balance of payments without
\nresorting to measures destructive of national or international
\nprosperity.<\/p>\n
Specifically, the IMF's response to the CB proposal did not
\nhelp to stabilize the rupiah, which was partly what the
\ngovernment was trying to do. Also, the threat of withholding the
\nloan package did nothing to assist the government in its task of
\nstabilizing the economy with minimum destruction to national and
\ninternational prosperity.<\/p>\n
Third, the IMF's preference in terms of the sequencing and
\ntiming of financial and economic reforms appears to be neither
\nwell formulated in theory nor sufficiently worked through in
\npractice. It has demonstrated little sensitivity to the complex
\nissues involved in implementing the Indonesian reforms. It is
\ntherefore ill-placed to justify its attempts to railroad through
\nits own preferences. More sensitivity is required.<\/p>\n
The moral of the story thus far is that two wrongs don't make
\na right. The IMF should raise its game by being more sensitive to
\nIndonesia's sequencing of its reforms. In return, the Indonesian
\ngovernment could more effectively reassure the international
\ncommunity of its commitment to real sector reform. More
\nspecifically, I suggest the following.<\/p>\n
(1) The IMF and the Indonesian government should sit together
\nand come to a better understanding of each other's perspectives
\non the timing and sequencing of the necessary reforms. This will
\nreduce the flow of conflicting signals to the markets and replace
\nit with consistent signals. This will reduce the level of
\nvolatility.<\/p>\n
(2) The IMF should attempt to be less negative and more
\npositive in searching for an appropriate exchange rate regime for
\nIndonesia and the region. It should initiate a regional forum of
\nleaders to initiate talks on an Asian monetary system. Current
\nregional exchange rate arrangements are outdated.<\/p>\n
There is a clear need for the design of a regional exchange
\nrate system based on an optimally weighted basket of Asian
\ncurrencies, designed to minimize intra-Asian exchange rate
\nvolatility in response to variations in the world's major
\ncurrencies such as the German mark and the U.S. dollar. The
\ntechniques are available to do this. All that is needed is the
\nwill.<\/p>\n
The writer is professor of Finance and Economics at the
\nUniversity of Technology, Sydney. His area of expertise is
\nmacroeconomic stabilization policy and international finance.
\nHe was senior economic consultant to the Australian Federal
\nTreasurer and the Federal Finance Minister during the early
\n1990s.<\/p>\n
Window: The IMF has not responded helpfully to the Indonesian
\ngovernment's proposal to stabilize the rupiah. It has
\ndemonstrated insensitivity to the plight of the Indonesian people
\nand the genuine attempts of its government to stabilize the
\nexchange rate in response to a battering from the international
\nfinancial markets.<\/p>",
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