'Conditionalities' choke RI's recovery
'Conditionalities' choke RI's recovery
By Sidhesh Kaul
This is the first of two articles on the relationship between
international institutions and Indonesian government.
JAKARTA (JP): Brazil, Peru, India, Somalia, Rwanda,
Bangladesh, Vietnam, Bolivia, Russia, Turkey, Bosnia-Herzegovina
and, of course, Indonesia.
This is a list of some of the selected and prize medals that
decorate the International Monetary Fund's proud chest.
The hand of an IMF-driven recovery has touched all of them and
a comparative study reveals a familiar pattern. It appears that
there is indeed some method in IMF's madness.
The pattern of economic subjugation prescribed by the IMF-led
International Financial Institutions (or IFIs) foretells a bleak
picture for Indonesia whose sovereign obligations far outstrip
the capacity to repay.
Recently, in the wake of the new wave of politico-economic
instability, the IFIs have joined voices in a chorus urging the
embattled government of President Abdurrahman Wahid to stick to
the several "conditionalities" that the several IFIs have
prescribed for the country.
Subservience to the demands of the IMF is well worth the
effort. The choice is between getting Indonesian assets to
perform productively and efficiently overnight, a task of
Herculean proportions given the current chaos, and agreeing to a
few conditions.
The vital tools in the hands of IFIs, led by the IMF, for
reigning in an economically embattled country are broadly
described as "conditionalities".
These "conditionalities" come attached to the loan agreements
and ostensibly serve the purpose of re-directing macro-economic
policy but in fact serve the narrow interests of the IFIs.
For a developing country, which has borrowed from the IFIs,
there is little choice but to synchronize the nation's debt
management policy with the IMF-driven macro-economic reform that
is warranted under the strict "conditionalities" regime.
The straitjacket of the "conditionalities" ensures that the
country continues to abide by its' financial obligations.
Debt management typically comprises deferring principal
payments and swapping of debt for equity whilst keeping the
interest payment current. Often the country has to borrow "new
monies" to pay interest arrears (so that the country can avoid a
default). This new burden of borrowings comes along with stricter
conditionalities.
The cycle carries on and very soon the crippled nation reaches
a state where it becomes a net exporter of capital, that is the
country pays more in terms of interest than the "new monies" that
flow in.
Bowing to the dictates of the "conditionalities" opens the
doors to the Paris and London Clubs, commercial banking
institutions and bilateral donors whilst non-compliance brings in
its wake obstacles in rescheduling the debt, difficulties in
obtaining new developmental assistance and blockages in short-
term credit (that would have the effect of crippling exports and
paralyzing debt servicing capacities even further). An errant
borrower would soon face isolation.
The IMF-World Bank's "conditionality" driven remedy begins
with a short-term macro-economic stabilization process (read as
devaluation, price liberalization and budgetary austerity) that
is followed up with a dose of more fundamental and structural
reforms.
The country's exchange rate is an important instrument of
macro-economic reform and the IMF-World Bank's short-term macro-
economic stabilization programs play a key political role in
pushing for devaluation.
Devaluation brings into play the supply-demand interactions
within an economy and affects the real prices paid to direct
producers as also the real value of wages and leads to a real
contraction in those industries and sectors that are heavily
reliant on imported inputs (including capital) but whose markets
are domestic.
Earnings are compressed and the dollar value of government
expenditures falls drastically and which in turn facilitates the
release of state revenues towards external debt servicing.
Then there is the social cost to bear. With the contraction in
the domestic sector and the subsequent effect this has on real
prices for consumer goods, the common man finally begins to feel
the pinch. Demands for an increase in real wages to counter this
effect fall on deaf ears.
The first symptom after a round of devaluation is spiraling
inflation and the "dollarisation" of domestic prices and at this
stage the IMF is quick to prescribe its standard "anti-
inflationary" program -- at best a diversionary tactic.
The program has little to do with the devaluation (the actual
impetus for the inflation and an aspect that has met with staunch
denial from the IMF historically) but instead focuses on a
contraction of demand -- reduction in public expenditure, cuts in
social sector programs and de-indexation of wages.
Decreases in government expenditure, as a direct consequence
of these measures, succeed in diverting state revenues towards
debt servicing.
In addition, the IMF prescribes a tight control on money
supply as a means of combating inflationary pressures.
The IMF's tight control over money supply would be impossible
without a pliant Bank Indonesia. The IMF's constant refrain for
"independence of Bank Indonesia from political power" (Is it more
than a coincidence that Bank Indonesia's senior officials are
former staff members of the IFIs?) is actually an effort at
shoring up their tactics to control money creation.
The government thus has very little control over domestic
monetary policy and the implication is that the country would
have little choice but to depend on international sources of
funding for real economic development.
Traditionally, the IMF is not going to settle for anything
other than total control over a country's monetary policy.
The domain of public finances too is subjected by the IFIs to
across the board austerity measures. The social sectors are also
not spared and the IFI's advocate programs on the basis of
economic feasibility (read as cost recovery) and the gradual
withdrawal of state funding from basic health and educational
services. Social sector funding is limited to targeted
"vulnerable groups".
The entire thrust of the IFIs is to ensure that the
government's cuts in public expenditure can bolster the repayment
scheme to international creditors. State investment in public
infrastructure projects is curtailed thus leading to a slowing
down of the rate of capital formation. The government is
basically denied the right to muster its' domestic resources for
deployment in any major project.
Concessions are made by the IFI's for "essential" projects in
the form of soft loans and under the watchful aegis of a set of
binding procedures.
The new rules of the game ensure that whilst the state's
burden increases, the interest payments keep flowing back to the
IFIs.
The explosion of social problems that follow the curtailment
of public expenditure has another important side effect -- the
ensuing destabilizing forces erodes the legitimacy of the
government in the eyes of the public and makes it even more
dependent on IFI-driven quick fixes.
The government is pressured to lift subsidies on fuel and
utilities. The net effect is a foregone conclusion -- domestic
prices spiral upwards in the market and the effect is sharpened
by the fact that there is a squeeze on real income. Cost
structures for both productions as well as distribution get
affected and domestic producers find that their local markets
have been surgically incised.
The Indonesian government is under severe pressure to forego
the subsidy on fuel and that too at a time when the country is
being wracked by social and political instability.
Whilst the government has managed to stave off increases in
fuel prices for the common man till later in October of this
year, industries (the major consumers of fuel) have been hit by
the increases immediately -- the increased costs in a market that
is experiencing a second round of currency devaluation is
detrimental to growth.
Whilst this situation is an impetus for industries to seek
export markets it spells death for those industries that cater
exclusively to the domestic market.
Indonesia has little choice but to swallow the bitter pill of
an IMF-driven regime of "macro-economic stabilization" policies.
But this is only the first phase of remedies and the treatment
does not end here. What follows next is a phase that entails the
implementation of "necessary" structural reforms.
The writer is a commentator on regional economic and political
issues based in Jakarta.