Bracing for the hight cost of life after the IMF

Mari E. Pangestu, Centre for Strategic and International Studies, Jakarta

The President's national day speech and proposed budget for 2004 provide the first glimpses of the issues and constraints that the government and Indonesia will face after we exit from the International Monetary Fund program. Based on People's Consultative Assembly (MPR) Decree No. 6/2003, the Indonesian government decided not to continue the IMF program and has chosen to go with the Post Program Monitoring (PPM) option. Under this option, Indonesia will not have access to further IMF loans, will not be eligible for loan rescheduling under the Paris Club mechanism, and will have to begin to pay off its foreign debt.

Instead of the Letter of Intent (LOI) under the IMF program, the government is preparing an economic recovery program, which is to be announced soon. The extent of the IMF "monitoring" comprises a review or dialog on Indonesia's economic progress and policies, which is usually conducted every six months. This is actually only once more than the normal annual consultations conducted for all members of the IMF.

The economic assumptions of the proposed 2004 budget are relatively realistic and acceptable, although one may question whether the growth rate can reach 4.5 percent and whether the inflation rate of 7 percent is too high. However, what is of interest in the budget announcement and planned program is life after the IMF in Indonesia. Whilst there are many issues to be discussed in the life-after-the-IMF scenario, let me focus on two major ones.

First is the "cost" of life after the IMF, which is immediately evident from the tight budget for 2004. There is still a deficit of 1.2 percent of gross domestic product, but this is lower than last year. However, due to the need for fiscal consolidation and raising revenues from income taxes (in the face of falling oil revenues), and minimal increases in the development budget, there is definitely no hope of fiscal stimulus from the budget.

The financing gap that needs to be financed in 2004 is much higher despite the lower deficit because of the need to service domestic, and more importantly foreign debt since there is no more rescheduling of debt payments.

It will also require hard work and strong discipline to increase income tax revenues to a level that ups the tax to gross domestic product ratio from 13.1 percent to 13.5 percent, better manage spending, and to meet the financing gap, all through privatization, the sale of assets under the Indonesian Bank Restructuring Agency and the issuance of bonds.

The only sure source of financing is from available funds in the government account. But, while these funds are important for the 2004 budget, they also use up available reserves. It is questionable how much more is available in the coming years.

Given this scenario, the role of government, central and local, in providing stimulus for the economy and basic service and infrastructure development, has become even more constrained than before.

If the government is to achieve 4.5 percent growth, then the source of growth and stimulus must come from the private sector and, in particular, from a significant recovery in investment. The recent bombing of the JW Marriott Hotel has, of course, not helped investor confidence.

Furthermore, the election processes which will preoccupy us for the whole of next year also mean that domestic and foreign investors will adopt a wait-and-see attitude.

What can be done to improve business confidence? Not much in the short term, but there is an opportunity for the government to propose and implement a credible program in the post-IMF scenario.

This brings us to the second issue, the so-called Indonesian economic recovery program that the government is preparing. The onus of the program is now with the government and with each department responsible for proposing programs, identifying the action plan and implementing them. A big step ahead in this regard would be to have the program of each department made transparent and accessible to all stakeholders.

This would show which government ministries were delivering credible programs, clear action plans, and whether they actually implement it. The responsibility and accountability will rest with the respective parts of the government; one cannot put the blame on the IMF anymore.

However, for the program to be credible, here are a few caveats and thoughts. On content, it is to be hoped that the program will have clear targets and deadlines, as well as specify how the targets are to be achieved.

Given the institutional and capacity constraints on the government, it would also be more realistic to not provide long wish lists, but instead to prioritize and focus on a few major issues that can be achieved in the short term.

The other targets can be mentioned as longer term targets. By now, expectations are low and realistically speaking, what is expected is that there is a prioritization of a few important targets, accompanied by clear action plans, which are subsequently implemented and delivered by the deadlines. If this could be achieved, it would provide a long awaited and important signal for all stakeholders.

The credibility of the program also rests on a credible monitoring process. There are a few possibilities which can be explored. First is for the government to initiate an independent monitoring body together with the stakeholders (civil society, private sector etc.).

Second, the stakeholders could also initiate their own monitoring mechanism, although it would be difficult to have effective monitoring without government cooperation and readiness to supply information. Finally whatever the modus of national monitoring chosen, the possibility of supplementing it by making public the outcomes of the IMF reviews conducted as part of the regular and PPM consultations should also be considered.