Here they come

The long-awaited review team from the International Monetary Fund (IMF) arrived here on Tuesday to conduct a two-week comprehensive evaluation of Indonesia's economic reforms, which were stipulated in the government's letter of intent (LoI) to the multilateral agency last September.

The team's arrival itself, which had been delayed since December, should be good news to the market, amid the escalating political uncertainty and weakening rupiah. After all, the IMF would not have sent its seven-member review team from Washington if both sides had not bridged their principal differences over the implementation of the September reform package.

Indonesian officials claim the government has completed all reforms as agreed last year with the IMF. These include the issues responsible for the postponement of the disbursement of IMF's third US$400 million tranche of the $5 billion bailout fund.

The House of Representatives has approved the sales of two nationalized banks, the government has issued a complete ban on regional administrations to make new borrowings, and put in place a better oversight mechanism for the powerful Indonesian Bank Restructuring Agency (IBRA).

The controversy over the government-proposed amendments of the 1999 Central Bank Law has also been resolved. Chief economics minister Rizal Ramli said the independent panel of Indonesian and foreign experts, who were assigned by the IMF to review the proposed amendments, shared the government's view on the need to improve accountability of the central bank's board of governors. Both parties also agree that the central bank's political independence should be maintained.

If everything goes as scheduled, the government will be able to send a new LoI to the IMF executive board in Washington later this month or in early May. The board will take about two weeks to approve the document and release the $400 million tranche held up since December.

A new IMF seal of endorsement of Indonesia's economic reforms and the injection of $400 million into the country's international reserves are expected to improve market sentiment toward the economy, which has virtually been in limbo since early this year, and the rupiah exchange rate, which has weakened to a 30-month low.

Another great significance of a new agreement with the IMF will be the confirmation of the government's debt rescheduling pact with the Paris Club of sovereign creditors, which was concluded last year for a total of $2.8 billion in debt principals. Without IMF's endorsement, the debt rescheduling deal would be canceled, and the government's foreign debt service burden for the current fiscal year would then increase by $2.8 billion to $10.2 billion, threatening the government with a payment default.

Even without such additional debt service burden, the state budget is already threatened by a ballooning deficit which is due to the errant assumptions on interest rates, the rupiah exchange rate, subsidy spending as well as revenue targets. Most analysts have estimated that even with the debt rescheduling deal remaining effective, the budget deficit could balloon to as high as 5 percent of gross domestic product (GDP), or Rp 70 trillion, from Rp 52.5 trillion or 3.5 percent of GDP, as originally planned.

Hopefully, with a new agreement with the IMF, the subsequently positive market sentiment toward the economy would be able to correct or at least reduce the deviations in the assumptions of the state budget, thereby preventing an unmanageable, explosive deficit.

However, this potential gain could still be diluted if the bickering among the political elite and the hostility between President Abdurrahman Wahid and the House worsened. The House's stance (to be made known on April 30) on Abdurrahman's recent response to its first memorandum of censure, will determine the effectiveness of a new LoI with the IMF in improving market confidence in the economy.

If anything, whether the Abdurrahman government survives or is replaced this year, an IMF-endorsed, hence internationally- supervised, reform package could still serve as an automatic pilot for the country's economic management amid the political turbulence.