Bracing for the hight cost of life after the IMF

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.