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