Here they come

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.