Commitment to reform key to recovery
JAKARTA (JP): Indonesia's way out from its worst ever economic crisis does not depend on the substance of the IMF-sponsored economic reforms but on the seriousness in implementing the program, economists have said.
Because Indonesia has not installed a new political regime, the recovery process will be incremental and longer than that in other crisis-hit countries, Mari Pangestu, executive director of the Center for Strategic and International Studies, said Monday.
"A change in the political regime is the first best policy to revive confidence that reforms would be implemented seriously," Mari told a seminar at the center.
She pointed out that both Thailand and South Korea formed new governments before implementing their reforms and that those countries had started to regain international confidence in less than six months.
Mexico recovered from its crisis earlier this decade in two years because its new government implemented reforms seriously, she said.
"Expecting a Mexican experience is not an option for Indonesia, because we don't have a new platform," she said.
Indonesia can only expect to recover in three to five years if the government implements the reforms seriously, she explained.
"Commitment in the implementation of reforms is the second best policy," Mari said, adding that positive signs of government commitment to follow the IMF-sponsored reform would attract capital inflow, but that negative signals would quickly scare off overseas capital.
An IMF team has been in Jakarta for almost three weeks reviewing Indonesia's economic reform programs, which are supported by the Fund's US$43 billion bailout package.
The review has focussed on monetary issues, banking reform, the budget and subsidies, structural reforms and private sector overseas debt. The results are expected to be announced today.
Relations between Indonesia and the IMF became strained when the country was seen to be backtracking from its commitment to the sweeping reform program agreed to in January.
But since the start of the reform review process, the two sides have been voicing positive developments, a major factor in the strengthening of the rupiah's exchange rate against the U.S. dollar from the 10,000 level to about 8,000.
The country's economy is reeling, prompted by the sharp plunge in the rupiah which dived to 17,000 to the dollar in January, compared to Rp 2,450 in pre-crisis July.
Hadi Soesastro, another economist at the center, said international confidence in Indonesia was vital for the country's economic recovery because foreign confidence would invite domestic confidence.
"The overseas market will be a key factor. If they think it is positive, the domestic market will react positively," said Hadi, pointing to the government's seriousness in implementing the reform programs.
He stressed that it was not the reform items that the market was studying, but the government's commitment to the reforms.
He suggested that the government provide a list of programs and a timetable for implementing them to establish credibility to the new reform package.
Both Mari and Hadi said that the government's credibility would be continuously evaluated by the market.
"We are in an imperfect situation because we didn't provide a new regime," said Mari, explaining the behavior of the market.
They said that credibility was also critical in solving Indonesia's banking and overseas debt problems.
Mari said the success of restructuring more than $68 billion in private sector overseas debt would depend on the government's commitment to the reform programs.
She added that since fixing Indonesia's ailing banking sector would need foreign capital, providing positive market signals was critical to attract capital inflow.
She, however, said that reviving the banking sector would take years because of an alarming level of bad debts from dying corporations.
To prevent a total collapse in the country's corporate sector, she urged the government to launch an emergency program, including trade financing. (08)