Curing the nation's paranoia toward the IMF

Curing the nation's paranoia toward the IMF

Julia Puspadewi Tijaja, Centre for Strategic and International Studies
(CSIS), Jakarta

Despite some opposition from the chief of the National
Developing Planning Board (Bappenas) Kwik Kian Gie and former
chief economic minister Rizal Ramli, our government has come up
with the decision to end the IMF's Extended Fund Facilities
program with the Post Program Monitoring (PPM) arrangement by end
of this year.

The nation's previously controversial relationship with the
IMF has resulted in a certain degree of hostility toward having
the IMF monitoring under the PPM arrangement.

IMF has conveniently been made the main scapegoat of our slow
and staggering recovery from the 1997 economic crisis in
comparison to other Asian countries. Recommendations made by the
IMF were seen to have led Indonesia into a deeper crisis -- a
naive oversimplification. Yet countries receiving loans from
international financial institutions are those already facing an
unfavorable economic situation, thus it is hard to know whether
Indonesia would be better off without the Fund, and worse still
to accuse the IMF program of being the cause of the crisis.

Strong criticism was made of the Fund's generic formulation of
tight fiscal and monetary policy in times of crisis. While the
latter was justified to put a stop on domestic currency
depreciation, the former received more criticism as being
insensitive toward the poor. However, the need to tighten our
fiscal policy mainly arises from our worrying level of fiscal
deficit.

Reckless fiscal expansion in the form of project funding often
has questionable effective surveillance and accountability at
times of political and economic instability. Misuse of such
funding will lead the country into higher deficit, without any
stimulative result in our economy. Despite all these, opponents
of international body monitoring tried to give their
justification for carrying the nation's economic reform without
PPM.

Opponents of PPM were optimistic about the soundness of the
Indonesian economy. Though our macroeconomic indicators have
indicated noteworthy improvement, our real sector has yet to be
stimulated. Without serious structural adjustment and financial
reforms, we should anticipate a reverse flow of our mainly short
term capital inflow when there is a sudden drop in market
confidence.

In a country like Indonesia where market sentiment is highly
sensitive to both economic and noneconomic factors, convincing
the market of the government's economic reform commitment is an
enormously challenging task. Moreover, in the face of the
upcoming election in 2004, there is a stronger need to secure
market confidence due to the uncertainties during the highly
volatile period of political transition.

The presence of an internationally recognized monitoring body
like the IMF would help secure market confidence. It serves as a
strong pillar that signals the government's seriousness at
pursuing realistic economic reform, mitigating market suspicion
that the economy will be ill-maintained during the battle for
political power. Thus, this will increase the immunity of the
Indonesian economy to noneconomic domestic shocks.

Another advantage of having the IMF as our monitoring body is
that we are able to pay our debt to the Fund in installments up
until 2010. Despite the fact that our present foreign reserve
absolute level of US$34 billion (inclusive of the $9.2 billion
owed to the IMF) is strong enough to repay our debts in a lump
sum, we should not be too reckless. There is evidence that the
market reacts asymmetrically more to negative perception, like in
the case when there is a sudden drop in our foreign reserves.

Without the PPM arrangement, we have to pay $5.9 billion in a
lump sum to bring our debts down to the quota level of $2.8
billion. It is extremely difficult to maintain market confidence
when there is substantial fall in the level of our foreign
reserves. Indeed, the interest we bear is a worthy cost to reduce
the risk of another herding capital outflow that we cannot
afford.

Hence, the option of having an international monitoring body
should not be confronted with "nationalistic" hostility and
unnecessary paranoia. Under the PPM arrangement, the IMF could
not restrict our economic policy, since their approval is not
needed in the policy-making process. It is their evaluation that
will be judged by the market. As long as the government is
carrying out policies favorable to market sentiments, there is no
reason to worry about the IMF's presence under the PPM
arrangement.

In this highly mobile world, staying under an internationally
recognized monitoring body shows that the government is careful,
acting in the best interests of our investors. It helps to
promote a conducive atmosphere for investment, which is
desperately needed to solve our problem of unemployment.

Economic actors will definitely have more confidence in a
"patient" accepting licensed doctors' monitoring and regular
medical consultation by being under PPM.

It is now time to prove the government's credibility in
undertaking economic reforms with self-drawn Letter of Intents
which are accountable to the nation.

The writer is also currently studying for an Economics and
Politics degree at Queen Mary, University of London, United
Kingdom