Dropping IMF would weaken RI's credibility: Economist

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.