Economic reform wobbles

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.