A pact with the IMF
A pact with the IMF
The government has signed yet another letter of intent with
the International Monetary Fund (IMF) pledging to implement
economic reform measures in return for the US$43 billion
international assistance that the agency has organized for
Indonesia. This is the fourth such letter signed since October,
and is a condition for the disbursement of the next $1 billion
tranche of the IMF money, which has been due since May, but
delayed because of the recent political turmoil.
The latest agreement is essentially a continuation of the
previous ones. A revision was necessary since a new government
is now in place. But a more important reason for the delay is
that the government and the IMF have had to revise their
assumptions and economic targets given that the economy has
rapidly deteriorated since the last agreement in April.
Although the new letter of intent gives much gloomier economic
targets, they are optimistic by today's standards. The
government, for example, predicts a 10 percent contraction in
gross domestic product (GDP) and an inflation rate of 80 percent
for this year. It envisages that the rupiah's exchange rate will
strengthen to Rp 10,000 to the dollar by the end of the year,
from about Rp 14,500 this week. Only time will tell if these
targets are realistic. The previous three letters of intent
turned out to be overtly optimistic with their targets as the
economy headed south in spite of the agreements with the IMF.
In the latest agreement, the government underlined two sectors
for priority: establishing a social safety net to cushion the
impact of the economic crisis on poor people, and restructuring
the banking sector, which is crucial to arresting the downturn
and opening the way for economic recovery. Both entail huge
financing, which is where the foreign fund comes in.
The social safety net programs, mostly for financing subsidies
in food, medicines, fuel, electricity, labor intensive projects
and school grants, are estimated to amount to a staggering 6
percent of GDP. Currently, the government has been printing
money, at the risk of fueling inflation, to finance them. The IMF
money will go a long way toward easing the inflationary
pressures.
More significant than the amount itself is the disbursement of
the money, which will be seen as an IMF endorsement of the
government of President B.J. Habibie. Many foreign governments
and lending agencies that joined in the $43 billion lending
consortium in October are waiting for the IMF's signal before
making good on their lending commitments.
The letter of intent also indicates the need for further
financing of between $4 billion and $6 billion to cover a huge
deficit in Indonesia's overall balance of payments this year.
Japan and Germany went ahead with their assistance before the
IMF, chiefly to finance trade facilitation schemes.
While the IMF's gesture may prompt foreign governments to act,
foreign and domestic investors, whose funds are equally vital if
the Indonesian economy is to recover, are not likely to be easily
impressed, just as they were completely indifferent to the
previous agreements between the government and the IMF.
Investors are primarily motivated by profits, while
governments extend loans often on compassionate if not political
grounds. Investors therefore take a lot more convincing. While
disbursement of the IMF money will certainly be a welcomed vote
of confidence for President Habibie, it is not enough. Investors
will want to see real and solid, rather than make-believe,
political stability before they return to Indonesia. That means a
real commitment to democracy on the part of the new government.
On that front, Habibie and his administration will have to work
alone. No amount from IMF can restore investors' confidence.