Is it time to bid goodbye to the IMF?<\/p>\n
Many people are unaware of the fact that the current
\nInternational Monetary Fund (IMF) program in Indonesia ends on
\nDec. 31 this year and cannot, under the rules of the IMF, be
\nextended.
\nIt is actually up to Indonesia to request a new arrangement if it
\nso desires. The choice for Indonesia is to decide on whether it
\nstill needs the exceptional international support a special IMF
\nprogram provides. The decision on whether or not to do so and
\nthe steps the government must take in support of that decision
\nwill have a major impact on Indonesia's medium and long-term
\neconomic future.
\nWhile there has been a great deal of public comment, particularly
\nfrom officials who dealt unsuccessfully with the fund in previous
\ngovernments, that the program should not be renewed, there has
\nbeen little discussion of the pros and cons of not doing so.
\nEven if one accepts the arguments of IMF critics like Joseph
\nStiglitz and Kwik Kian Gie (which I do not) that IMF policies
\nsomehow caused or exacerbated Indonesia's financial crisis in
\nlate 1997, the cooperation with the Megawati government has been
\nexemplary over the past 18 months, much to Indonesia's benefit.
\nThe major criticism seems to be that an IMF program forces
\nIndonesia to follow inappropriate economic policies in trying to
\nmeet the standards set by the fund so it can approve balance of
\npayments support program. This criticism seems to be short on
\nspecifics and long on emotion, the major emotion being that it is
\ninappropriate for any non-Indonesian institutions to have so much
\ninfluence on the country's economic policy.
\nOn the other hand, one of the major benefits of having Indonesia
\ninvolved in a program with the fund is the credibility the
\nexecution of an IMD program brings to the country in its
\nrelations with third parties like the members of the Paris Club,
\nnegotiating program aid with Consultative Group on Indonesia
\n(CGI) member countries or seeking to improve its international
\ncredit rating with groups like Moody's, S&P and Fitch.
\nThe market is reacting cautiously to Indonesia's potential exit
\nfrom the program. One reason rating agencies and the market in
\ngeneral tend to look favorably upon the country that it is
\nseriously trying to implement a program in cooperation with the
\nIMF is the notion there is a "corridor" of acceptable policies
\nthat the government's financial officials are limited to, and
\nthus it is very unlikely that damaging policies will be put in
\nplace.
\nThere are many who believe that the existence of a program with
\nthe IMF provides an extremely useful policy framework and
\nanalytical support. External evaluation of the government's
\nbudget and the policies through which the budget revenues and
\nexpenditures are established provides good discipline in budget
\ndevelopment and policy implementation.
\nIt also provides economic and financial professionals with
\nexpertise to support their personnel in debates with politicians
\nover programs that may be politically attractive but financially
\ndisruptive.
\nThe policy framework argument is, of course, one of the most
\nhotly debated and politically sensitive aspects of an IMF program
\nin any country. There are, however, also serious financial
\nconsiderations which are more easily quantified and subjected to
\nobjective evaluation.
\nIn Indonesia's case, this immediately relates to the Paris Club
\nwhich will provide external finance of over US$3 billion in 2003.
\nThis is equivalent to about 20 percent of non-interest current
\nspending. The Paris Club relies heavily on the imprimatur of the
\nIMF in deciding the terms under which it will provide this
\nfunding. If there is no IMF program, there will be no Paris
\nClub, so the financial planners have to ask themselves how they
\nwill replace this $3 billion in 2004.
\nIf this money cannot be replaced, what would be cut from the
\nbudget? This is not an easy question because Indonesia's budget
\nis already relatively austere even though it provides a deficit
\nequal to nearly 2 percent of GDP. There is really no room to
\nincrease this deficit. The target for this year is 1.8 percent
\nof GDP and 1.3 percent next year.
\nThese targets will not be easy to meet in an economy which is not
\nyet operating at full capacity. One can argue that the budget
\nneeds to give some support to demand so it will be virtually
\nimpossible to eliminate the deficit in the next several years.
\nIf in 2004, an election year, the government were to set a fiscal
\ndeficit target of about 1 percent of GDP as its target, it would
\nprobably have to implement tax increases or spending reductions
\nor some combination of the two equal to about 0.5 percent of GDP.
\nHow can this be done in an election year when both tax hikes and
\nsubsidy reductions will be extremely difficult to accomplish?
\nIndonesia can still turn to the CGI but even here there are
\nproblems. In 2002, the CGI promised budget support of about Rp
\n33 trillion, of which the government was able to use only Rp 20
\ntrillion. Some of the shortfall in utilization was due to
\nconditionalities of program financing where financing is offered
\nin exchange for specific reforms.
\nIn recent years, the government has often been unable to get
\npolicies in place to utilize available funds. These
\nconditionalities often relate to the passage of legislation in
\nthe House of Representatives which is frequently well beyond the
\ncontrol of the administration.
\nA third area often ignored in the public debate on the IMF's
\nprogram is the domestic debt market. This is important because
\nif the government is going to give up the $3 billion of external
\nfinance provided through the Paris Club, then it will need to
\nraise that much money domestically.
\nThe situation is made even more serious because recapitalization
\nbonds will start to mature in increasing amounts next year. In
\nfact, depending on the pace of government buy-back plans this
\nyear, nearly Rp 30 trillion of recap bonds mature next year.
\nA large amount of this is going to have to be financed in the
\ndomestic bond market. The government planned to start building
\nthis market several years ago but parliament only passed the
\ngovernment securities law late last year. This enabled the
\ngovernment to place Rp 2 trillion in bonds very successfully last
\nDecember and it plans to place another Rp 7 trillion to Rp 8
\ntrillion this year. The specific amount needed in 2004 is yet to
\nbe determined, but it will be a multiple of this year's figure.
\nIf the government is to have any chance of success of raising
\nsuch a large amount of money in the domestic market, it will face
\na real market test. The market will ask many questions. Is
\nmacroeconomic policy on track? What is the prospect for
\nincreased inflation? Are reforms going forward? Is new
\ninvestment coming in?
\nIn the absence of very clear and positive answers to such
\nquestions, the market will only take this enormous amount of
\ndomestic debt at very high interest rates which could well
\ndestabilize the budget. So if the IMF program is not in place,
\nthe government will have to successfully implement an even more
\nrigid reform program than it has been committed to, but unable to
\nimplement, in the past several years.
\nThe government might also have to explain to the public of why it
\nis paying commercial rates for finance when they would be giving
\nup World Bank and Asian Development Bank (ADB) funding which, at
\n2 percent, is by far the cheapest money available to Indonesia.
\nSave for compelling political or policy reasons, the government
\nshould ensure that it is utilizing all other forms of financial
\nassistance before resorting to these more expensive financial
\nmechanisms.
\nMost importantly, will the absence of the IMF program in 2004
\nthreaten the success of the economic reforms and debt reduction
\nalready accomplished?
\nThe worst possible outcome would be for the government to subject
\nitself unnecessarily to an extremely tight budget with no margin
\nfor error, and then suffer some external shock which it cannot
\nabsorb, causing it to go back to the IMF in a year or 18 months
\nfor a new program.
\nIf this were the case, the credibility the current financial team
\nhas earned by reducing debt, stabilizing the currency, reducing
\ninflation and lowering interest rate would be lost and prove much
\nharder to regain.
\n3<\/p>\n
1<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/is-it-time-to-bid-goodbye-to-the-imf-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }