Hanging in the balance

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.