Economic reform wobbles

Many are worried that the economy will most likely become the first victim of the heightened political uncertainty and worsening relationship between beleaguered President Abdurrahman Wahid and the House of Representatives because the pace of reform measures will surely wobble.

The series of structural reforms the government has committed itself to pursuing in a bid to build up a stronger foundation for a sustainable post-1997 crisis recovery requires a strong and popular leadership. That is because most of the measures will either be painful to the average person or will result in formidable opposition from vested-interest groups who still hold strong positions in the country.

The problem though is that the two most important elements of working capital -- the moral and popular legitimacy of the government -- required to ensure consistent implementation of reform is now decreasing sharply as a result of the recent House censure motion against the President and the continuing campaign by his opponents to oust him.

Abdurrahman's promise of accelerated reform made partly in response to the House's rebuke looks hollow as many of those involved in the reform agenda which requires House approval have become stuck in protracted debates.

The most glaring case in point are the government-proposed amendments to the central bank law which are now already several months behind schedule. This is indeed quite worrisome as the country is now embroiled in the kind of situation that sorely needs an independent central bank to lend credibility to macroeconomic management.

But what the country now has is a central bank, the legal status of which is being questioned and debated at the House, whose governor (Sjahril Sabirin) is on trial as a suspect in a corruption case related to the Bank Bali scandal. Worse still, the majority of its board of governors have actually resigned and yet remain in office only until their replacements are appointed.

No wonder the International Monetary Fund, the sponsor of a US$5 billion bailout fund for Indonesia, has held up its third disbursement of the fund scheduled for last December. This multilateral agency is indeed walking a fine line between not contributing further to market uncertainty and pressing for what it sees as essential reform.

True, postponement of credit disbursement would not likely affect Indonesia's balance of payments, not at least for the time being, as the country's current account surplus has been boosted by last year's booming exports. But the most devastating effect of the IMF move is the damage it is incurring to foreign confidence in the country's economy as the IMF, irrespective of its widely criticized shortcomings, remains a very influential opinion leader among foreign creditors and investors.

The IMF's negative assessment of Indonesia's record with regard to reform measures will jeopardize upcoming negotiations with the Paris Club of sovereign creditors at a time when the government badly needs to reschedule part of its foreign debt repayment to maintain its budget deficit at a manageable level.

Also what is quite worrisome are the persistent jitters among foreign investors about the business climate in the country. If foreign investors don't start making investments this year, as the export industry has already utilized almost 80 percent of its capacity and it takes about one to two years to build a manufacturing plant, the economy may become stagnant. If the overall condition remains as fragile as it is now, most foreign investors may write off Indonesia outright from their business map.

It is therefore imperative that amid heightened political uncertainty the government acts faster and more determinedly to grasp the nettle of reform, as already agreed with the IMF. The House, despite its adversarial relationships with the President, is called on to profess statesmanship qualities by fully supporting the implementation of reform. The top priority for the House and government is to now speed up the amendments of the central bank law that will maintain the independence of Bank Indonesia.

The current uncertain fate of Abdurrahman's presidency will not matter as much to investors as long as macroeconomic management remains sound, economic policies consistent and predictable and law enforcement effective.