Hanging in the balance
Although the government and the International Monetary Fund played down their failure to reach a new agreement on Indonesian reform programs on Wednesday, one cannot help but think that maybe things had gone awry in principle rather than technically in the last review meeting.
Chief economics minister Kwik Kian Gie's explanation that the government was unable to sign a new letter of intent (LoI) on reform programs because the IMF executive board in Washington had yet to examine and approve the terms has raised some serious questions. The statement by Anoop Singh, chief of the IMF review team from Washington, that final agreement with the government had not been reached -- and that an understanding had been reached only at the mission level -- did not help clarify the situation.
In the past, under the previous administrations of Soeharto and B.J. Habibie, the term "agreement on a mission level" was unheard of. Back then the LoI was always finalized in Jakarta. The IMF review team from Washington was indirectly involved in the preparations under the supervision of the IMF Asia Pacific director or his deputy, a position now held by Anoop Singh. It was the chief of the review team, not the executive board in Washington, who hammered out the final decree based on the results of the review in Jakarta and the terms of a new letter of intent. This was understandable because the head of the review team was supposed to be in constant communication with the IMF managing director in Washington.
There used to be a time lapse of one to two weeks between the signing of the LoI and the IMF executive board's approval for the disbursement of loans from the bailout fund, but never between the final conclusion of the review and the LoI signing.
However, even if our sense of foreboding is misplaced and we seem to inordinately read too much into the delay of the signing of the new LoI, letting the new agreement hang in the balance until June 5 only due to a "technical matter", as Kwik claimed, is still mind boggling and especially damaging to the government's efforts to restore Indonesia's credibility in tandem with its commitment to reform measures. After all, the bimonthly review was already two months behind the original schedule after the IMF decided in late March to postpone it because of the government's failure to meet many of the reform deadlines.
It would not have raised so many worrisome questions if the new LoI was signed immediately after the conclusion of the review, for that would have signaled the full endorsement of the IMF, even though the IMF executive board convenes in early June to approve the next loan disbursement.
Moreover, putting the new LoI on hold until June 5 at the latest was practically leading Indonesia to a brinkmanship position because the LoI approval determines the next disbursement of US$400 million out of the IMF bailout fund that the government does not urgently need right now anyway. Most importantly, IMF endorsement is badly needed to build market confidence and also determines the effectiveness of the April 13 agreement between the government and the Paris Club of sovereign creditors on the rescheduling of $5.8 billion in debt principals. As it happens, June 5 is the deadline given by the Paris Club in which to decide whether the agreement will be effective or not, contingent upon IMF approval. Failure to meet this deadline would be disastrous to the budget for almost $2.5 billion in debt principals, already presumed to be rescheduled, would have to be repaid in the current fiscal year alone.
Whatever the reason, the message in the delay of the signing of the new LoI is crystal clear. The government's political will and capability to implement sorely needed reforms is still in doubt. The IMF trust in Indonesia has not yet returned to the point when the multilateral agency enthusiastically renewed its bailout program with the freshly elected, legitimate government of Abdurrahman Wahid in January.
In spite of Singh's praise of the government's efforts over the last month to catch up with its reform programs, the IMF seemed greatly worried by the indefinite postponement of the domestic oil fuel price hike that is threatening the budget with an explosive deficit, and by inadequate preparations for fiscal decentralization.
The IMF seemed disappointed with the tendency on the part of the government, despite its legitimacy, to adopt populist, yet economically damaging, measures. It appeared frustrated with the slow pace of measures intended to develop good governance (anticorruption) and the extreme lack of resoluteness in pushing ahead with bank and corporate restructuring.
The pace of reform measures within the next few weeks will be quite crucial in influencing the decisions of the IMF executive board at its upcoming meeting.