Letters of Intent frustrate Soeharto to Megawati<\/p>\n
M. Sadli, Emeritus Professor of Economics, University of Indonesia,
\nJakarta<\/p>\n
Part 2 of 2<\/p>\n
In the end, it was Megawati Soekarnoputri as vice president,
\nwho in May, 2001, took an initiative to invite back the
\nInternational Monetary Fund.<\/p>\n
The IMF replied that it was ready to do so on three
\nconditions: First, there should be a review of the government
\nbudget for the year 2001; second, the efforts of the government
\nto change Bank Indonesia's Governor, Syahril Sabirin, should be
\nreconsidered in respect to the Law upholding the independence of
\nthe central bank; and third, the idea of assets backed
\nsecuritization should be discarded. Then vice president Megawati
\nsucceeded with the cooperation of the legislature, and Anoop
\nSingh of the IMF came in June 2001.<\/p>\n
On Aug. 27 this year a new Letter of Intent was signed. The
\nenvironment was more friendly this time because Megawati was
\nPresident and the new economic team was much more IMF-friendly.<\/p>\n
The IMF also discarded the old "micro-management" approach
\nwhereby many items covering a lot of areas were made specific
\ntargets with deadlines for execution, in matrix-like time table.
\nThe IMF shifted more to "macro (economic) management".<\/p>\n
The current IMF program will end in 2002. But the government
\nneeds further bilateral debt rescheduling after 2002 through the
\nParis Club. That requires the country having an IMF program, a
\ncurrent Letter of Intent (LoI) and good relations with the IMF.
\nHence it is pretty sure that there will be an extension of the
\nIMF program for another three years.<\/p>\n
Will the end of such dependence on the IMF occur in the medium
\nterm? South Korea and Thailand have graduated out of that. The
\nprospect for Indonesia is still uncertain. Thirty years ago it
\ntook from 1967 to 1974, i.e., seven years, to cut this umbilical
\ncord.<\/p>\n
Again, upon recommendation of the IMF, the budget deficit is
\nbeing contracted. From some 5 percent of gross domestic product
\nin 2000, this tolerable deficit is put at 3.7 percent of GDP for
\n2001 and should go down to 2.5-2.7 percent in 2002. Of this
\nshortfall only one-third could come from net foreign aid.<\/p>\n
Gross foreign aid is much bigger but the largest part will go
\nback for repayment of principals. Hence a long round of debt
\nrescheduling is required to lessen the burden of total external
\ndebt equal to GDP and more than twice of exports of goods.<\/p>\n
In 1969 the country received 30 years of debt rescheduling
\nwithout amortization costs through the intermediation of Dr.
\nHermann Abs, a German banker. On top of that, the Paris Club gave
\nseven years grace, the amounts to be added to the last seven
\nyears of repayment.<\/p>\n
Today the country desperately needs a similar break. The role
\nof the IMF may be important for finding such a resolution, but
\ndebts to the multilateral institutions are far more difficult to
\nreschedule or to be accorded forgiveness. For the time being,
\nthis major foreign debt overhang is weighing as a heavy albatross
\naround Indonesia's neck.<\/p>\n
From a fiscal standpoint there is ample room for improvement
\nof the government budget, but this requires painful measures and
\na good doses of political will. If and when the large subsidies
\nfor domestic fuels and electricity rates can be phased out, the
\nsavings can be some 5 percent of GDP.<\/p>\n
The prices of kerosene and diesel oil are only a fraction of
\nthose in Singapore with the result of extensive smuggling.
\nDomestic tax revenues are also some 4 percent of GDP below what
\nis current in neighboring countries.<\/p>\n
Hopefully the high savings rate prevailing in South and East
\nAsian countries can return in Indonesia. That will solve part of
\nthe problem, but not quite for the balance of payments gap. That
\nwill require return of normal flows of external capital, which is
\nnot forthcoming as yet.<\/p>\n
At the present time the IMF, World Bank and Asian Development
\nBank, have still a lot of complaints about unresolved problems
\nwith respect to the restructuring of the Indonesian economy.<\/p>\n
The old complaint is that so many reforms, committed in LoIs
\nsince 1999, are still tepid in execution, such as banking
\nrestructuring, privatization of state enterprises, sale of IBRA
\nheld assets, overhaul of the judiciary system, and stemming
\ncorruption.<\/p>\n
Disbursement of Asian Development Bank and Japanese co-
\nfinancing is being stalled because he passing of new laws to meet
\nconditionalities, like for money laundering and the basic law on
\nthe state electricity board, are proceeding very slowly in
\nparliament.<\/p>\n
The numerous conditionalities imposed by the multilateral
\ninstitutions are not quite in line with the political mood and
\nwill of the country embroiled in a messy political process
\ntowards greater democracy.<\/p>\n
That begs the question as to whether the IMF, the World Bank,
\netc., are severely overasking, or whether such external pressures
\nare constantly needed, but do not expect smooth and expedient
\naccommodation.<\/p>\n
All of the required reforms are badly needed, but more time is
\nrequired for implementation. In the end the IMF has shown
\nflexibility and more patience, but that differs from time to time
\naccording to the quality of the government counterpart. With
\nMegawati Soekarnoputri the international goodwill and patience is
\ncertainly greater than with B.J. Habibie and Abdurrahman Wahid.<\/p>\n
Lastly, with the Bank Indonesia there is also something of a
\nrunning battle about monetary policies. The IMF regards the
\nmanagement of the volume of base money (amount of money in
\ncirculation attributable to the central bank) too lax, resulting
\nin a higher inflation (10 percent per annum and up) than is good
\nfor economic recovery.<\/p>\n
Bank Indonesia's defense is that it has to accommodate the
\nincrease of demand for liquidity as a result of severe
\ndepreciation of the rupiah and the consequent rise in import
\nprices and others related. It is kind of a chicken-and-egg
\nphenomenon.<\/p>\n
The above was the writer's presentation at the one-day Joint
\nPublic Forum on Indonesia. It was held in Singapore on Nov. 1 by
\nSingapore's Institute of Southeast Asian Studies and Jakarta's
\nCentre for Strategic and International Studies.<\/p>",
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