Tue, 25 Jan 2000

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.