Jakarta Post Anniversary Article<\/p>\n
Is it time to bid goodbye to the IMF?<\/p>\n
I was honored and pleased when I was requested to contribute to
\nthis special anniversary supplement. I thought I could most
\nusefully take advantage of the space offered to me by commenting
\non one of the most controversial aspects of Indonesia's efforts
\nto recover from the devastation of the Asian financial crisis,
\nnamely Indonesia's relationship with the International Monetary
\nFund (IMF).
\nThe public debate is highly politicized and accurate descriptions
\nof the true nature of the relationship between Indonesia and the
\nIMF are few and far between. I will try to provide such a
\ndescription here.
\nWhile many people are aware that the current IMF program in
\nIndonesia ends on Dec. 31 this year, few are aware that, under
\nthe rules of the IMF, the program cannot be extended. It is
\nactually up to Indonesia to request a new program if it so
\ndesires.
\nIndonesia must decide whether the country still needs the
\nexceptional international support a special IMF program provides.
\nThe decision on whether or not to do so and the steps the
\ngovernment must take in support of that decision will have a
\nmajor impact on Indonesia's medium and long-term economic future.
\nWhile there has been a great deal of public comment that the
\nprogram should end, particularly from officials who dealt
\nunsuccessfully with the IMF in previous governments, there has
\nbeen little discussion of the pros and cons of the IMF
\nrelationship.
\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 government of Megawati
\nSoekarnoputri has been exemplary over the past 18 months, much to
\nIndonesia's benefit.
\nThe major criticism today seems to be that the program forces
\nIndonesia to follow inappropriate economic policies in trying to
\nmeet the standards set by the IMF so it can approve balance of
\npayments support program.
\nThis criticism seems short on specifics and long on emotion, the
\nmajor emotion being that it is inappropriate for any non-
\nIndonesian institution to have so much influence on the country's
\neconomic policy.
\nOn the other side of the coin, one of the major benefits of
\nhaving Indonesia involved in a program with the IMF is the
\ncredibility the execution of the program brings to the country in
\nits relations with third parties, like the members of the Paris
\nClub, negotiating program aid with member countries of the
\nConsultative Group on Indonesia (CGI) or seeking to improve its
\ninternational credit rating with groups like Moody's, S&P and
\nFitch.
\nThe market is reacting cautiously to Indonesia's potential exit
\nfrom the program. Many believe that the existence of a program
\nwith the IMF provides an extremely useful policy framework and
\nanalytical support.
\nExternal evaluation of the government's budget and the policies
\nthrough which the budget revenues and expenditures are
\nestablished provides good discipline in budget development and
\npolicy implementation.
\nIt also provides economic and financial professionals with
\nexpertise to support their positions in debates with politicians
\nover programs that may be politically attractive but financially
\ndisruptive.
\nOne reason rating agencies and the market in general tend to look
\nfavorably upon a country that it is seriously trying to implement
\na program in cooperation with the IMF is the notion that the
\ngovernment's financial officials are limited to a "corridor" of
\nacceptable policies, so it is very unlikely that damaging
\npolicies will be put in place.
\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.<\/p>\n
In 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.
\nIf there is no IMF program there will be no Paris Club, so the
\nfinancial planners have to ask themselves how they will replace
\nthis US$3 billion in 2004? If this money cannot be replaced,
\nwhat would be cut from the budget?
\n This is not an easy question because Indonesia's budget is
\nalready 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 deficit target is 1.8 percent of GDP
\nfor this year and 1.3 percent next year.
\n These targets will not be easy to meet in an economy which is
\nnot yet operating at full capacity and is certain to be hurt
\nfurther by the economic ravages of the SARS epidemic.
\nNevertheless, one can argue that the budget needs to give some
\nsupport to demand so it will be virtually impossible to eliminate
\nthe deficit in the next several years.
\nIf in 2004, an election year, the government were to set a fiscal
\ndeficit of about 1 percent of GDP as its target without a Paris
\nClub agreement, it would probably have to implement tax increases
\nor spending reductions or some combination of the two equal to
\nabout 0.5 percent of GDP. How can this be done in an election
\nyear when both tax hikes and subsidy reductions will be extremely
\ndifficult to accomplish?<\/p>\n
Indonesia 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 (DPR) which is frequently well
\nbeyond the control of the administration.
\nA third area which is often ignored in the public debate on the
\nIMF program is the domestic debt market. This is important
\nbecause if the government is going to give up the $3 billion of
\nexternal finance provided through the Paris Club, then it will
\nneed to raise 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. If the IMF program is not in place, the
\ngovernment will have to successfully implement an even more rigid
\nreform 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 why it is
\npaying commercial rates for finance when they would be giving up
\nWorld Bank and ADB money which at 2 percent interest is by far
\nthe cheapest money available. Without compelling political or
\npolicy reasons, the government should ensure that it is utilizing
\nall other forms of financial assistance before resorting to these
\nmore expensive financial mechanisms.
\nMost importantly, will the absence of the IMF program in 2004
\nthreaten the success of the economic reforms and debt reduction
\nalready accomplished? The worst possible outcome would be for
\nthe government to subject itself unnecessarily to an extremely
\ntight budget with no margin for error, and then suffer some
\nexternal shock which it cannot absorb, causing it to go back to
\nthe IMF in a year or 18 months for 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 rates will be lost and much
\nharder to regain.
\nWithout an IMF program, a vital safety net is removed. The
\nabsence of the program will bring substantial costs and risks
\nthat deserve more thoughtful public debate than they have
\nreceived thus far. The Jakarta Post, as always, will continue to
\nplay an important role in facilitating this debate.<\/p>\n
3<\/p>\n
1
\nJames Castle<\/p>",
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