The Rows on IMF<\/p>\n
Tata Huberta
\nEconomist
\nWashington D.C.<\/p>\n
Indonesian media feasted on the rows over the role of the
\nInternational Monetary Fund (IMF) on the Indonesian economic
\npolicy makers last week. On center stage was Minister Kwik Kian
\nGie with his controversial statement. Meanwhile, a soothing
\nstatement was made by Minister of Finance, Dr. Boediono, at the
\nsidelines of the meeting with the legislature on June 5, which
\nindicated that the government still would like to continue its
\nrelation with the Washington-based Institution until the
\nexpiration of its contract in 2003.<\/p>\n
Minister Kwik first pointed out that the IMF loans to
\nIndonesia was basically meant to support Bank Indonesia's foreign
\nexchange reserves and nothing can be made out of that money for
\nbudgetary purposes. This is correct. The IMF loans are basically
\nused by all the borrowing countries as some kind of a "balance of
\npayments support" which will add to the borrowing countries'
\nforeign exchange reserves.<\/p>\n
This principle applies to all the borrowing countries. For the
\ncountries in a desperate need of reserves, this kind of loan
\nproved its usefulness. But once the countries have reached some
\nlevel of stability, the need for a "balance of payments support"
\ndiminish.<\/p>\n
The second point raised by Minister Kwik was that Indonesian
\ntaxpayers have to bear the interest rate burden while the loans
\nthemselves were rarely used. This statement is only partially
\ncorrect. The IMF indeed charges a rate of interest to the
\nborrowing contries, called "the rate of charges". This is based
\nnot on the US dollar but on special drawing rights (SDR), which
\nis a composite of interest rates of a number of major
\ncurrencies, i.e. US Dollar, Japanese yen, Euro and Pound
\nSterling. This rate is a floating rate and reset weekly.<\/p>\n
Currently the rate is set at 2.97 percent. Bank Indonesia, as
\nthe holder of the IMF money, is able to invest the money in the
\nmost optimal way, based on the return and risk of this
\ninvestment. If the IMF money is invested in the five-year US
\nTreasury Bonds, the IMF money will bear interest (yield) of 4.32
\npercents in the US dollar.<\/p>\n
At the maturity of the IMF loans, the return of the
\ninvestment, computed in SDR, has to be matched with the interest
\nrate paid to the Fund. The net result will constitute the net
\ncost or net return, depending on the outcome of the investment.
\nIf the exchange rates of the major currencies are stable, it is
\nalways possible to come up with a net return rather than a net
\ncost to the government. If the dollar strengthens during the
\nborrowing period, the gains on such IMF loans are even greater.<\/p>\n
The third point relates to the Letter of Intent agreed with
\nthe IMF. Minister Kwik strongly indicated that the LoI is
\nbasically useless. This issue on conditionalities of the Fund's
\nprogram is always contentious. This document, while formally is a
\nreflection of the government own policy, is basically a joint
\ndocument. The IMF's role in designing this document is
\nundeniable. However, its finalization rests also on the
\nnegotiating skill of the Indonesian government to arrive at the
\nbest policy mix. There was a time when the previous government
\ncame up with its own proposal which was accepted by the IMF.<\/p>\n
Yet, even then, the government's proposal was not that
\nsignificantly different with the Fund's recommendations.
\nTherefore, little can be argued that the LoI has so far served as
\na common platform for the Indonesian government, the IMF and the
\ndonor community. At a time when the government was filled with
\ninertia, the LoI served as the main guiding light for the
\nIndonesian economic strategy. If not satisfied, the government
\ncould certainly also come out with its best policy alternatives
\nand discuss these with the IMF in an amicable way. So far,
\nnothing has been done that way.<\/p>\n
What is rarely discussed is the catalytic role of the Fund's
\nprogram. While the direct benefits of the IMF loans are quite
\nclear-cut, the catalytic role of the Fund's program is certainly
\nless obvious.<\/p>\n
First, the disbursement of the IMF loans normally serves as a
\n"seal of approval" for the other donor institutions (such as the
\nWorld Bank and the ADB) or countries to release their own funds.
\nWhen the IMF loan was frozen in the wake of East Timor's
\nincidents, the loans by other International lending agencies also
\nstopped.<\/p>\n
Second, the completion of the Fund's review also constitute
\none of the "prerequisites" of the loans rescheduling in the Paris
\nClub. This condition, clearly stated in their website, links the
\nrequest of the Indonesian government for further rescheduling of
\nthe official loans to the "seal of approval" of the IMF.
\nTherefore, the severance of the Indonesian policy from the IMF
\nprogram should also consider what kind of cashflow that the
\ngovernment would like to have a few years from now. If the
\nprojected cash flow indicates that we need further Paris Club
\nrescheduling, we may have to be very careful with what we are
\ndoing now.<\/p>\n
Third, the "seal of approval" also relates to the market's
\nperception. The absence of such approval will prevent the
\n"market" from investing in Indonesia, either through portfolio
\ninvestment or foreign direct investment. They will see the
\nsituation as a kind of risk that will prevent them from
\nconsidering any investment activity in this country.<\/p>\n
This question has been raised a number of times. There are a
\nnumber of cases where such a contract can be dicontinued, such as
\nin the case of Korea and Thailand. They were able to complete
\ntheir programs with the Fund successfully so that at the end of
\nthe arrangements they could declare to the world that they were
\nable to "graduate" from the Fund program. The market responded
\nwell.<\/p>\n
For Indonesia, the prospect of completing the program with the
\nFund in 2003 is also not small. For the last few months, the
\ngovernment was able to make progress in a number of areas of the
\nprogram. The market flooded the country with funds. The current
\nIndonesian case may have exceeded the progress made by the Thai
\ngovernment at the time of their completion of the Fund program.
\nTherefore, the remaining one and half years can be used more
\nusefully in speeding up the reform process.<\/p>\n
After completion of the program, the Korean and Thai
\nauthorities continued to welcome the IMF guidance through the
\n"Post Program Monitoring". This is an instrument where such a
\ncooperation may help the countries continue to be on track on
\ntheir reform agenda. For Indonesia, this instrument might also be
\nuseful as a replacement for the Fund program as one of the
\n"prerequisites" of the Paris Club loans rescheduling.<\/p>\n
Therefore it is always possible for Indonesia to complete the
\nprogram with the Fund. And the completion of the program could
\nmark as our "graduation".<\/p>\n
The Indonesian relation with the IMF may then have to be
\ntreated in a very gentle way. A statement by an official such as
\nMinister Kwik in public could easily (the next morning) irk some
\npeople among the management and the Board members of the
\ninternational lending institutions.<\/p>\n
At the time when we are just "one lap" away from the finish
\nline, it will be more useful if such discourses can be switched
\nto the more meaningful discussion, such as "What is our agenda
\nafter the IMF?"<\/p>",
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