Habibie's economic agenda

Habibie's economic agenda

The economic agenda tabled by President B.J. Habibie at the
inaugural meeting of his cabinet on Monday should impress the
International Monetary Fund (IMF) team which arrived here
yesterday to review progress on the program of reforms agreed
between Indonesia and the IMF in exchange for emergency loans.
The importance placed by Habibie on ensuring a sufficient supply
of basic commodities is essential if a new wave of social unrest
and rioting is to be prevented. He also seems to have realized
that setting the wheels of the economy in motion once again is
the only way to bring this nation back from the brink of economic
collapse.

The President demonstrated a full awareness of the vital
importance of foreign loans. He rightly conceded that the economy
did not operate in a vacuum and that the success of efforts to
attract flows of foreign capital back into the country were
therefore contingent on a quick and painless resolution to the
political crisis. His rapid movement to release political
prisoners and demonstrate his strong commitment to overall
political reform are clever moves to jump start the process of
regaining public confidence. This is essential because the IMF
and top U.S. officials have made it crystal clear that no aid to
Indonesia will be forthcoming until there is strong evidence that
political reform is proceeding.

These early signs are quite encouraging, more so because they
have come from a personality who has thus far been regarded as
fiscally profligate and economically naive by domestic and
international markets alike.

President Habibie and his cabinet inherited a paralyzed
economy. Before beginning their efforts to stabilize the economy
they should first take steps to ensure that it does not totally
collapse. Thousands of foreign businessmen, professionals and
diplomats (including World Bank and IMF personnel) fled Indonesia
in fear of their lives after rioting in North Sumatra, Jakarta
and several other provincial cities over the last three weeks.
Huge sums of capital accompanied them on their flight.

Foreign lenders, including the IMF, World Bank and Asian
Development Bank (ADB), delayed loans. Industrial plants are in
deep trouble because large numbers of expatriate managerial staff
have left the country. Foreign traders have been refusing to
accept Indonesian letters of credit, and the distribution
networks in several cities have been destroyed. Inflation,
originally projected at about 50 percent this year, could spiral
to more than 75 percent, and economic contraction, predicted
early this year at 5 percent, could worsen to more than 10
percent.

Despite the 80 percent collapse in the value of the rupiah
since July last year, companies have been unable to finance
exports, a problem which has been worsened by the flight of the
country's ethnic Chinese community, who took their sizable
capital reserves with them.

Negotiations that started yesterday with an IMF team headed by
Asia Pacific Director Hubert Neiss are yet another crucial step
toward regaining international confidence and attracting back
foreign capital.

A positive assessment of progress on the reform package will
not only lead to a resumption of financial aid from the
organization itself, but will also unlock billions of dollars in
additional assistance from the World Bank, ADB and a number of
bilateral donors who take their lead on Indonesia from the IMF.

World Bank loans are badly needed to assist the immediate
establishment of a social-safety net, including labor-intensive
programs to employ the millions of jobless workers. The longer
such initiatives are delayed, the more serious become the risks
of a new wave of social unrest and rioting engulfing the country.
Speedy disbursement of aid from the ADB is no less important
because it will accelerate restructuring of the country's banking
sector.

Credits from country donors such as Singapore, the United
States, Japan and Australia will help reinvigorate Indonesia's
foreign trade, which is currently crippled because of the
international communities' refusal to accept letters of credit
from Indonesian banks.