Extending IMF program

Extending IMF program

If securing another debt rescheduling package is the primary
motive behind the Indonesian government's request for the
International Monetary Fund (IMF) to extend its program for one
year, reform efforts in the country will never be able to achieve
the level capable of generating sustainable economic recovery
even after 2003.

True, debt rescheduling alone is already a compelling reason.
The government may default on its US$74 billion foreign debts if
it cannot get another rescheduling deal from the Paris Club of
sovereign creditors at least for debt principals maturing between
April 2002 and March 2004. Since the Paris Club deal is tied to a
borrower's conformity with IMF programs, the government needs to
extend the IMF facility, which is scheduled to expire in December
2002, at least for another year.

However, a one-year extension would not be effective for
building stronger foundations for sustainable recovery if the
government and the House of Representatives did not augment their
cooperation in grasping the nettle of reform.

Indonesia has been the worst performer among the three IMF
'patients' in East Asia -- Thailand and S. Korea are the other
two -- since it has often backtracked on its reform commitments.
Many reforms and structural efforts prescribed under the IMF
programs since November 1997 have fallen behind schedule.
Consequently, market confidence in the economy has never been
restored. Worse still, policy reversals have often nullified the
positive impact of previous reforms, which were taken at great
pains.

The first IMF program, involving $12 billion in bailout funds,
was abruptly ended in December 1999, and was replaced with a new
three-year program in January 2000 under then president
Abdurrahman Wahid. This $5-billion program was then expected to
run much better, assuming that, as the first democratically-
elected president since 1955, Abdurrahman would be more capable
of mustering political support for painful reform measures.

However, Abdurrahman was able to properly lead the nation and
govern the country only for a few months until the first quarter
of 2000. His leadership had become increasingly erratic since
April 2000 as he was facing an impeachment process and was
embroiled in political squabbles with the House of
Representatives.

The reform process was stifled amid his heightened
confrontation with the House and policy consistency and
continuity were impaired by his misguided penchant for tinkering
with his cabinet. Worse still, while Abdurrahman was preoccupied
with his battle with the House, his latest chief economic
minister, Rizal Ramli, chose to pick a fight with the IMF,
blaming the multilateral agency's too pushy attitude for many of
the problems the country was encountering.

The IMF decided to cancel its program in December 2000, as
most reform measures fell behind schedule and some good policies
taken previously were reversed. The IMF vote of no confidence
further damaged market sentiment, causing the economy to bleed
more profusely as the rupiah fell steadily from 7,500 to the
American dollar in January 2000 to 10,500-11,000 in the first
half of this year, and the central bank had to impose a credit
crunch to cope with inflationary pressures from imports. Almost
one year was lost until the program was restored in August soon
after the election of President Megawati Soekarnoputri to replace
Abdurrahman in late July.

Admittedly, reform is far more difficult in Indonesia than
Thailand and South Korea as painful measures have to be pursued
at a time when the nation is facing complications from the
transition from 30 years of authoritarian and centralized
government to democracy and regional autonomy. It is certainly
not easy to topple the vested interests, which had benefited
greatly from the old system, and which still command great
resources to fight for their power and privileges.

But it is precisely because of these formidable challenges
that the government needs a credible international supervisor of
its reform programs. As we have often asserted in this column,
the IMF involvement in the country is required not so much for
its loans as for the international endorsement it lends to the
government's program.

The Paris Club's insistence that debt rescheduling must be
based on conformity with IMF programs is prompted by the
empirical evidence that governments in countries suffering severe
economic crises are often too weak to manage painful measures
without international support and oversight.

Therefore, the House, which has often criticized the IMF for
what it sees as excessive intervention in Indonesia's
sovereignty, should support the government's request for an
extension of the IMF program. Despite its shortcomings, IMF
involvement is required to maintain international creditors'
commitment to the country. The current IMF program could be the
last chance for the country to secure a sustainable economic
recovery.