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.