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.