Dropping IMF would weaken RI's credibility: Economist

Dadan Wijaksana, The Jakarta Post, Jakarta

Indonesia is not yet ready to terminate the current role of the International Monetary Fund (IMF) as such a move would risk the country losing crucial foreign financing sources and damage investor confidence, say experts.

They also argue that the IMF's approval for the government's ongoing economic reform program is still needed in order to maintain its credibility.

Questionable credibility would put pressure on the country's credit rating, thus further weakening Indonesia's competitiveness in attracting much-needed investment, economists Muhammad Ikhsan and Anton Gunawan told The Jakarta Post on Thursday.

"A drop in the country's rating would make the cost of capital higher, making Indonesia less attractive to invest in compared to other countries," said Muhammad, the director of the Institute for Economic and Social Research at the University of Indonesia's School of Economics.

Even with the IMF breathing down its neck, the government had been struggling to bring about the reforms necessary to create a conducive investment climate here.

Anton, a Citibank economist, also questioned the government's ability to discipline itself without having some outside party watching over it.

"In 2004, we're going to have an election, which makes it even harder for the government to act as everything will become highly politicized, coupled with the fact that IBRA (Indonesian Bank Restructuring Agency) will no longer be around.

"So, given all this, can the government maintain its discipline? Even more importantly, can the government convince others that it can maintain its discipline?," Anton asked.

Anton and Ikhsan also said that this credibility issue would come on top of a more concrete problem should the IMF no longer have a say, namely, a loss of potential financing sources for both the budget and balance of payments.

Anton predicted that without the IMF, in 2004 alone Indonesia would lose debt relief facilities amounting to around US$3 billion, which would otherwise be available from the Paris Club if the IMF's role were maintained.

Although domestic sources could still cover the payments, such a huge amount would put pressure on the rupiah. He said funding options could come from the investment funds account (RDI), and windfall profits gained from the difference in oil revenues between the actual prices and what had been targeted in the state budget.

"With the expected slow growth in exports, such capital outflows would rapidly increase the demand for dollars, which would put pressure on the rupiah," said Ikhsan, adding that this would put the country's hard gained macroeconomic stability at risk.

The two economists were asked to comment on Wednesday's statement by a group of 35 economists, which said that Indonesia would be better off without the IMF.

Rizal Ramli, a former coordinating minister and leader of the group, said that the economy would fare better without the presence of the IMF given the huge financial resources that had yet to be fully maximized. Not only that, the group of 35 claimed that certain IMF programs, notably divestment and privatization, had pushed the economy deeper into crisis.

The IMF's current economic reform program will end later this year. Signed in 1999, the agreement allows the country to access around US$5 billion in loans in return for the meeting of a number of key economic reform targets. The government has yet to decide whether to terminate or extend the program.

But the government is planning to set up a special team that will be charged with designing appropriate policies and diagnosing the consequences should the country graduate from the IMF's tutelage.

However, given the government's poor record in fulfilling its own pledges of reform "when nobody was looking", Anton was of the opinion that the role of the IMF should be extended for around a year in order to give the government a cooling-out period before completely parting ways with the Fund.

"The way I see it, splitting with the IMF this year is premature. The government still needs a transition period of between half a year to a year before it can graduate from the IMF," Anton said.