Fri, 09 Aug 2002

Blaming only the IMF a deceitful gimmick

Abdul Mongid, Alumni, University of Wales, United Kingdom

One main theme of discussion, especially among economists and politicians, is how to "get divorced" from the International Monetary Fund (IMF). The reason for this is: The economy has not yet fully recovered since the 1998 economic crisis, even though Indonesia has been the IMF's patient. The second reason is the IMF's prescriptions, which have always placed added pressure on the economy and the public. Critics of the IMF use the bank restructuring policy as a perfect example of how the IMF has tried to make Indonesia poorer.

The IMF has been active in formulating and applying almost all economic policies since the 1998 crisis emerged -- from the budget deficit to the tariff policy.

Discussing the role of the IMF means reviewing the Letter of Intent (LoI) signed by both parties. Basically, the LoI contains the following items:

a. Monetary policy: At the core of the IMF's prescription on this issue is an effort to tighten monetary policy, to curb inflation and resist depreciation of the rupiah. To make the monetary policy credible, the IMF has suggested that the government makes Bank Indonesia independent. This is a clear attempt to build up confidence in the Indonesian economy.

b. Financial sector reform: The IMF believes the real problem in the economy and the fragile banking sector is corruption and the herd mentality, which is why it tends to support the liquidation of ailing banks. Liquidation will improve the structure of Indonesian banks and improve their efficiency.

To improve the capital position of the banking system, the IMF has suggested a recapitalization program. To improve governance, the IMF has also suggested a banking supervision master plan. The swift selling of shares owned by government is important to reduce the burden on the budget. The IMF has also suggested legal action against bankers and bank owners who have committed crimes.

c. Corporate and public governance, transparency and accountability. The IMF knows the country's scale of corruption, collusion and nepotism in Indonesia and its implications. Based on a report by International Transparency, Indonesia is the most corrupt country in Asia and one of the worst in the world.

To make Indonesia sustainable, improving corporate and public governance is essential. Blaming the private sector is not fair because the lack of governance arises from the public sector. The rule of law does not work and proximity to political patrons is more important than good behavior. The exercising of a court decision is very costly and fraught with uncertainty.

d. Fiscal policy: The IMF suggests the government reduce external debt by reducing subsidies, especially on goods such as oil. Rationalization of subsidy expenditure would provide a sustainable basis; subsidy allowances would be reviewed to achieve the poorest. All non-budgetary funds should be managed under one escrow account. Tax management should be reviewed and necessary action should be taken to expand tax revenues.

e. Decentralization: The government must reconsider the impact of its decentralization policy and take actions to reduce it. Improving local tax to increase sustainability and governance is also important.

f. Central bank reform: Granting Bank Indonesia's independence would provide credibility and a long-term perspective to monetary policy. Increasing corporate governance, transparency and accountability would create a sustainable basis. To achieve its targets, Bank Indonesia must review all its systems.

g. Macroeconomic framework: The main principle to achieve recovery under the IMF's guidance is prudential macroeconomic policy. Lowering inflation, reducing the debt ratio from 100 percent of gross domestic product (GDP) to less than 65 percent of GDP and a maximum budget deficit of 5 percent of GDP are all examples of prudential macroeconomic policy. The IMF also requires BI to reduce the growth and quantity of base money to boost the exchange rate.

h. Others: The IMF also requires the government to improve the business climate by boosting the energy sector, improving agricultural policy and conserving natural resources to achieve long-term sustainability. Last, but not least, is the government's obligation to amend regulations on environmental issues and the management of natural resources.

The LoI should be considered as covenants in the credit market. Improving transparency and accountability has been public demand for some time. Long-term development perspectives are necessary amid the failure of previous governments to reduce widespread deforestation. Reducing subsidies for the rich and transferring it to the poor would help foster national unity.

The problems and failures of IMF-supported programs should be investigated with more realistic perspectives. Indonesia's indecisive attitude may play a more significant role in the failure of many of these programs. When the government in November 1997 closed 16 ailing banks, the market welcomed the news. Yet the situation worsened when people sensed foul play.

Many of us blame the IMF for the woes of the agricultural sector in Indonesia. The opening of grain markets has caused local products to be driven out of the market due to their high prices -- for which we must blame our negotiators. The flood of imported grain may also have arisen because of Indonesia's inability to stop illegal imports and so guard the interests of farmers. The same failure also occurred in the case of sugar cane.

Suggesting that nationalized assets from ailing banks are sold swiftly is correct. The amount of money that has been poured into saving the banking system has almost reached Rp 700 trillion. Quick selling does incur large losses, but this is the cost of the crisis. Slow and inactive efforts to sales, plus corruption, have worsened the problem and there is a tendency for these ailing banks to take the government hostage.

The failure to achieve the results as expected in partnership with the IMF should be thought out calmly. The IMF's policy prescription, which has caused a downturn in the Indonesian economy cannot be rejected. But blaming the IMF for the slow economic recovery and all its failures could create other problems. Experience teaches us that when we blame the IMF, the international community thinks we are diverting the issue away from making efforts to combat corruption, transparency and accountability.

We should be mature by blaming the failure on ourselves, not the IMF. After all, we have not yet applied all suggestions and prescriptions. The IMF is important for Indonesia and the other way around. Good cooperation may bring better results than if we continue to blame each other.