Bailout program extended
Bailout program extended
The government's new letter of intent to the International
Monetary Fund (IMF) signed last week not only revives the IMF
bailout program, which was technically suspended in September
because of the Bank Bali corruption scandal, but also extends the
scheme by two years until the end of 2002 with more than US$3.6
billion in new loan commitments.
This means that while two other IMF patients in Asia --
Thailand and South Korea -- are off the critical list and well on
the way to recovery, Indonesia will remain in IMF's emergency
unit under the close supervision of major sovereign and
multilateral creditors for another three years.
The country is still saddled with a crippled banking system,
mountains of corporate debt and a stagnant economy, and is
struggling to reform government and legal institutions riddled
with corruption. But even before the suspension of the IMF aid
program, the government had lost several months' worth of
economic reform during the last few months of the preceding
Habibie government.
Vital bank restructuring, which is the key to economic
recovery, has been very slow and the government has missed a host
of deadlines for most structural measures outlined in the
previous IMF program.
The new program increases IMF's contribution to the $43
billion bailout fund to almost $16 billion from $12.3 billion as
originally planned, but its thrust remains very much similar to
the central theme as outlined in the November 1997 bailout
program.
The 43-page Memorandum of Economic and Financial Policies
attached to the letter of intent makes Indonesian policy
directions widely transparent. This in turn will help
businesspeople to assess the prospects and calculate the risk of
businesses and the House of Representatives to supervise the
government economic management.
The document clearly stipulates the government's policy
directions for the next three years and details the programs of
action and their targets for this year.
Obviously, the short-term agenda remains the improvement of
stable macroeconomic environments through concerted efforts to
check annual inflation below 5 percent, to further lower the
central bank's benchmark interest rate to below 11 percent,
maintain a stable rupiah exchange rate at Rp 7,000 to the
American dollar and the current account at a manageable position.
Without a stable macroeconomic condition nothing else could
happen. However, a stable macroeconomic condition is not
sustainable without fiscal and structural reforms and the
empowerment of public institutions, which together form the
medium-term policy directions for the period until the end of
2002.
Fiscal reforms are crucial for gradually lowering and
eventually abolishing the budget deficit, which is envisaged at
the equivalent of 5 percent of the gross domestic product this
year. They are also a precondition to the smooth implementation
of intergovernmental fiscal relations, which are sorely needed to
placate separatist sentiments in resource-rich provinces.
Structural reforms in the financial and corporate sectors are
similarly pivotal for sustaining economic recovery because the
health of the economy as a whole depends on the soundness of
business units. Likewise, the reform of public institutions,
notably the empowerment of the judiciary system, is a key to good
governance, without which the economy will never become efficient
and competitive.
In addition to providing more funds in loans, there is another
advantage of the extended bailout program: the longer period for
IMF's direct involvement in Indonesia's economic management. The
reason is quite obvious. Structural reform is never an easy task,
especially in Indonesia where vested interests are still
politically strong. Hence, foreign creditors and investors feel
comfortable to know that the IMF, despite its shortcomings and
past mistakes in handling the East Asian economic crisis, will
still act as an independent and credible watchdog of the
implementation of the reform measures.