The preemptive bailout<\/p>\n
The almost US$40 billion in aid pledged by multilateral
\ninstitutions and country donors to the Indonesian government and
\nthe technical support and direct surveillance by an international
\nteam of experts led by the International Monetary Fund for the
\nnext three years will surely help restore confidence in the
\nnation's economy.<\/p>\n
Once market confidence is restored, the turbulence of the
\nrupiah is expected to subside and gradually settle to a stable
\nmarket exchange rate range. This in turn will enable businesses
\nand the government to plan operational budgets and investment
\nprograms. A calmer foreign exchange market would enable monetary
\nauthorities to ease the credit crunch at a faster pace.<\/p>\n
However, the government cannot yet afford to sit back and
\nrelax, because a flight with the International Monetary Fund
\noften encounters other turbulence in the form of temporary social
\nand political pain caused by the medicine which has to be taken.<\/p>\n
But the strategic decision to call in the IMF and its team of
\nmacroeconomic doctors before the crisis became full-blown was
\nquite helpful in minimizing some of the pain. After all, actions
\nand commitments taken before a crisis becomes full-blown carries
\nmuch stronger conviction with the market than the same policies
\ntaken under duress.<\/p>\n
In the traditional standby loan of the IMF, fund disbursements
\nare made only in quarterly tranches and, in the Indonesian case,
\nover three years, and this disbursement depends on the
\ngovernment's performance in fulfilling the reform measures
\nalready set as a condition for the aid.<\/p>\n
The government must have realized that restoring market
\nconfidence is a gradual process. The faster, bolder and broader
\nthe reform, the quicker the confidence-restoration process.<\/p>\n
But we must admit that judging from the reform package,
\nannounced on Friday, the restoration of confidence will likely
\ntake much longer than expected. First of all, the three-year
\npackage is deficient of two important factors. First, the scope
\nof the measures is much less than what the market had expected.<\/p>\n
Second, the package provides only a broad outline of
\ngovernment intentions. It will take several days or even weeks
\nlonger to complete all the rules, decrees and directives needed
\nto implement the program. Then, it will take some time for the
\nranks and files within the government bureaucracy to comprehend
\nthe agenda before it is implemented.<\/p>\n
All this amounts to a rebuttal of the official claim that the
\nIMF team had been called in mostly to look at the reform program
\nalready prepared by the government, to recommend the necessary
\nchanges and to provide financial and technical assistance to
\nsupport its implementation. We had actually expected clear-cut
\nmeasures in all their legal and technical details for at least
\nthe first of the three-year stabilization program.<\/p>\n
Even the most concrete measure of the program -- the closure
\nand liquidation of 16 commercial banks -- not only seemed hastily
\nprepared, but also raised lingering questions as to the viability
\nand solvency of some of the remaining banks. Moreover, as
\ndepositors have not been well-briefed on where they will receive
\ntheir maximum Rp 20 million reimbursement, long lines formed at
\noffices of the liquidated banks might trigger undesirable
\ndevelopments, which could have been avoided had technical details
\nof the liquidation and the protection of small depositors been in
\nplace.<\/p>\n
We portend a situation fully pregnant with jitters within the
\nnext few weeks, as the market waits for further announcements
\nwhile the government works hard to stem the spread of a panic set
\noff by the largest liquidation the nation has ever seen in terms
\nof the number of banks closed at one time.<\/p>\n
As the number and names of banks liquidated differed
\nsignificantly from what the market had expected, the rumor mill
\nwill unavoidably set to motion temporary banking panic and runs,
\neven on some solvent institutions. Hopefully the central bank, as
\nthe lender of the last resort, has prepared a financial safety
\nnet for illiquid, yet solvent banks which may be hit by a banking
\npanic and run.<\/p>\n
The central bank -- if necessary and if it is really convinced
\nwith the viability of its assessment that remaining banks are
\nsolvent judged from the standard prudential regulations and not
\nby their political connections -- should come out with a public
\nannouncement of full support for the remaining banks.<\/p>\n
But all in all, what ultimately counts is the political
\neffectiveness and acceptability of good policies, because when a
\ngovernment suffers low credibility, credible reform measures can
\nhelp restore it. Credibility is key to solving the crisis,
\nbecause the situation the nation is now in will probably get
\nworse before it gets better.<\/p>\n
We are confident that direct IMF surveillance will guarantee
\nagainst backsliding and will make sure the government will follow
\nthrough with the implementation of the prescribed reforms -- or
\nthe economy will collapse.<\/p>",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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