A future without the IMF?
A future without the IMF?
Juergen Kaiser, Jubilee.De, Dusseldorf, Germany
Throughout the month of June Indonesia saw a quite lively
debate regarding its future relationship with the International
Monetary Fund. It has been instigated by State Minister of
National Development Planning Minister Kwik Kian Gie and it has
ended with the cabinet decision to extend the current arrangement
with the IMF for another 12 months till end 2003.
There is good reason to presume that breaking away from the
Washington institution has never really been considered by the
impressive bunch of hardliners, which has joined into Kwik's
rhetoric (Vice President Hamzah Haz and People's Consultative
Assembly Speaker Amien Rais). Most probably, Kwik's harsh words
were targeted at a domestic audience, which needed to be
confirmed that the government was not a puppy of Western
interests.
However, the ambiguous character of the maneuver does not
invalidate its content, particularly as Kwik, coordinating
minister for the economy, finance and industry, knows what he is
talking about. So the question he raised, which are definitely
worth answering are:
Is the cooperation with the Fund actually benefiting or rather
harming Indonesia?
Can there be a future for such a fragile economy as
Indonesia's without the inflow of new funds, which can only be
mobilized by the Fund, and nobody but the Fund?
At the outbreak of the Asian Crisis Indonesia found itself
before the alternative to either let its largely bankrupt banking
system go down the drain, or to use public funds to save it.
Counseled by the IMF, the predecessor administrations of
President Megawati Soekarnoputri decided to pile up a huge
internal debt of the state, which today amounts to roughly half
of GNP in order to recapitalize the actual banking system. The
alternative would have been to disrupt a large part of
Indonesia's economic activity by accepting the bankruptcies of
practically all the major Banks.
Subsequently the same state funds would then have been used to
finance a brand new credit industry under the control of the
state. Administrations had some reason to fear the consequences
of such a disruption and to rather do their utmost to keep the
existing system working.
The Indonesian state has had to pay a twofold price for this:
First it has left most of the Soeharto-era structures in the
financial web of the country intact. Had the state dared to use
the some $60 billion internal bonds to capitalize new
institutions which might have taken up the banking function, this
would certainly have caused major disruptions in the country's
economy. On the other hand it would have given the country a kind
of fresh start regarding its financial and entrepreneurial elite
-- something which is painfully lacking, when nowadays even
cabinet ministers lament that the country's bureaucracy is
"corrupt to the bones".
Secondly, the recapitalization of existing banks has
maneuvered Indonesia into a kind of debt trap. One of the merits
of the debate instigated by Kwik was to have highlighted some of
the most malign dimensions of this trap: As the recapitalization
bonds bear interest in the range of 13 percent to 14 percent,
they place a heavy burden on the state budget. At the same time
it has been an IMF key condition, to privatise the banks and to
use the proceeds from these asset sales for closing existing gaps
in the current budgets.
This pressure to sell has lowered the assets' value to the
extent that in some cases the government can realistically expect
to receive less for their assets than what they still owe to the
sold institutions in the form of interest on the recap bonds.
Observers consider a recovery rate of some 30% of what the
state has actually invested as realistic. This, of course, is not
only due to high interest rates but also to the poor quality of
the recapitalized banks' assets. A perfect trap so: No (meager)
sales -- no balanced budget -- no new money from the IMF (and other
donors) -- more budget problems.
While many -- including the author -- had felt that in
1998/1999 recapitalizing the banks had been an unpleasant but
unavoidable exercise, it now becomes clear that the government
has put its head into the noose, which now starts being torn
tight. It has been Kwik's merit, and those, who, for whatever
reason, have joined him, to at least have cried foul.