Cohesion a must for Indonesia's recovery

By Sidesh Kaul

This is the first of two articles commenting on the government's effort to resuscitate the ailing economy.

JAKARTA (JP): The International Monetary Fund (IMF), right from the inception of the crisis in Indonesia, has stodgily maintained its position of not interfering in the business of corporate restructuring.

Instead, the IMF chose to impose harsh policies from an ivory tower and restricted the definition of "economic recovery" for Indonesia to tighten its macroeconomic policies, the rehabilitation of banks and the imposition of guidelines for corporate restructuring and structural reforms.

The Indonesian government, under monetary and fiscal pressures, has had little choice but to swallow this bitter medicine in exchange for much needed funding.

The "one-medicine-cures-all" kind of policies historically dished out by the IMF in debt-ridden countries has only ensured a string of half-baked recoveries. On the second anniversary of the onset of the crisis, the several and recent self-congratulatory media releases on the purported Indonesian recovery rings hollow upon examination.

The meaning of "recovery" needs to be understood in context. The relative strengthening of the Indonesian rupiah, the reining in of inflation or the conclusion of the bank recapitalization program alone are not reasons enough to believe that the worst is over.

For one, recapitalization has been done on the basis of bad loans declared by the banks on their respective books. These books were double checked and audited by neutral, credible and expensive experts who were flown in from all over the world. No guarantees were issued by any party, credible or otherwise, that there would be no surprises in the future should this bad loan portfolio expand.

To date, there has been no mention of any plan to cope with any expansion in the bad loan portfolio. Neither is the 20 percent portion injection from the banks' shareholders fully in yet, nor has there been any display of intent or political will on the part of the government to impose and collect on the penalties from violations of the legal lending limit. Then there is the episode of the retransfer of bad loans, under extremely suspicious circumstances, from the Indonesian Bank Restructuring Agency (IBRA) to the state banks. Not to forget the absence of even a mention of a rehabilitation plan for the state banks.

Indonesian banks are a long way from recovery and there is fear that there is no cohesive plan to shepherd the banks to health. The IMF, along with the Indonesian government, has to understand that the core of the problems in Indonesia stemmed from structural and systemic weaknesses and unless and until these shortcomings are remedied there can be no real recovery.

The reason Indonesia's recovery is a cause for concern is not because it is a laggard when compared to the other crisis-hit Asian countries. The concern arises because, and unlike other Asian contagion hit countries, the bulk of Indonesia's debt problems are on the private side and there appears to be a significant lack of policy or direction as to how this issue is going to be tackled other than belligerent noises being made about debt recovery and about recalcitrant debtors being brought to heel.

The credit for the strengthening of the Indonesian rupiah and the reining in of inflation are a direct consequence of the tightening of the macroeconomic policies. No attempt is being made here to steal the thunder and glory away from the IMF or the Indonesian government. All three measures were much needed, i.e. the strengthening of the rupiah, the reining in of inflation and the recapitalization of the banks.

As the Indonesian government moves forward, under the aegis and guidance of the IMF, it cannot escape the fact that Indonesian corporations, where the bulk of the problems lie, need the same tender loving care and attention that was meted out to the banks on the road to recovery.

The concern here is that despite the recognition of the fact that the bulk of Indonesia's debt problems are in the corporate domain, the government, as well as the IMF, are once again adopting a "one-medicine-cures-all" kind of approach as far as corporate recovery is concerned.

In fact the approach adopted by the government cannot be labeled as corporate recovery -- it is more of a debt collection exercise with little or no regard for the impact a heavy-handed approach would have on the overall economy. The agency that has been charged with the responsibility for this exercise is IBRA, which has the onerous task of recovering the debts from creditors and it has essentially stepped in where the original lenders failed to collect.

The staff at IBRA are banking professionals who were mostly picked from banks that were either closed down by IBRA or are under the management of IBRA. This implies that the people who made the wrong credit decisions in the first place now have the responsibility of rehabilitating the very corporations they lent to and engaging them in a delayed workout -- herein lies the first inherent conflict and contradiction.

The writer is an observer of economic and political affairs based in Jakarta.