Exiting IMF program

Exiting IMF program

There has been mounting pressure from economists, politicians and
even some Cabinet ministers for the Indonesian government not to
extend its program with the International Monetary Fund (IMF)
after its expiry later this year.

These critics, of whom former chief economics minister Rizal
Ramli is the most prominent, cite many mistakes allegedly
committed by the IMF in its handling of the Indonesian economic
crisis, especially between 1997 and 1999, that they claim led the
country into an even deeper crisis.

It would indeed be a confidence-building achievement if
Indonesia could successfully complete its program with the IMF
later this year as scheduled.

That was what Thailand did in June, 2000 after it completed
its 34-month Standby Arrangement with the IMF, succeeded in
building up credibility for its commitment to consistently
implementing reforms and immediately entered the IMF Post-Program
Monitoring.

Different from Indonesia's current program (Extended Fund
Facility) with the IMF that requires comprehensive, and sometimes
acrimonious, policy reform review every quarter, the Post-Program
Monitoring scheme only provides for frequent consultations with
the IMF, in addition to the annual IMF Article IV review as part
of its surveillance mechanism. The Thai government has since been
free to design and sequence its reform programs without the IMF
constantly looking over its shoulders.

True, as the local critics have asserted and many other
international analysts have observed, the IMF made several major
mistakes in 1997 and 1998 in its simultaneous handling of the
economic crises in Thailand, Indonesia and South Korea.

But then, in retrospect, in so far as Indonesia is concerned,
the blame should not be put squarely on the IMF alone. The IMF
mistakes would not have been so devastating had then president
Soeharto not so stubbornly resisted reforms to defend the vested
interests of his family members and cronies.

Worse still, the government has often backtracked on its
reform commitments or reversed measures deemed politically and
socially unfeasible. And things have been complicated by the
learning process in democracy and local autonomy. What had really
happened in Indonesia is the sum up of mistakes piled upon
mistakes of both sides -- the IMF and the government -- with each
side's errors compounding the others'.

The basic question now is whether the government has gained
international confidence in its political ability and leadership
to consistently implement the reforms badly needed to lay
foundations for a sustainable economic recovery.

Market confidence is quite crucial because right from the
outset the IMF involvement in Indonesia has been designed
primarily to get an international endorsement of its reforms, not
for its loans, which cannot be spent to support the state budget
anyway. The IMF money is meant only as second-line defense in the
country's balance of payments.

Unfortunately, though, the government's records have thus far
been not good enough to convince the international market that it
will be able to consistently execute reforms without a
punishment-and-reward mechanism that is now provided by the IMF.

Many instead are greatly concerned that the political
commitment to take on reforms, notably the painful and unpopular
ones, could waver during the election year in 2004 when the major
political parties that form the current government and acquiesce
to the temptations to pursue populist measures at the expense of
the long-term good of the economy.

Both the government and the House of Representatives should
therefore be extra careful with regard to the status of IMF
involvement, analyzing its advantages and disadvantages and the
impact of the program's termination on Indonesia's relations with
its international creditors and the government's ability to get
foreign debt rescheduling.

The biggest issue that needs to be addressed is how the end of
the IMF Extended Fund Facility would contribute to building up a
more effective and strong national leadership to accelerate the
execution of the desired reform measures. After all, most of the
reforms stipulated in the program with the IMF are precisely the
measures that have to be implemented to gain sustainable
recovery.

In fact most of the alternative programs recommended by the
IMF's staunch critics are by and large along the lines of the
policy measures outlined in the government's quarterly letter of
intent to the IMF.

The IMF has streamlined its conditions and has increasingly
emphasized the importance of national ownership (national
political consensus) of policy reforms to provide the government
with more freedom and a broader leeway in designing reform
measures it considers socially and politically feasible.
Most importantly, the government should improve its policy-making
credibility and reform executing ability during the remaining
eight months of the IMF facility in order to graduate from the
program later this year as scheduled.

There is nothing so sacred about the People's Consultative
Assembly decree of last August on the IMF program. It is simply a
recommendation to the government not to renew its program with
the IMF beyond 2003. The implementation of the recommendation
certainly still depends on the prevailing condition.