IMF again delays loan

IMF again delays loan

The government got another thumbs down from the international
supervisor of the country's economic reform, resulting in another
delay of at least two months in the next disbursement of the
International Monetary Fund's (IMF) US$5 billion bailout fund.

With international oil prices remaining high and exports
persistently robust, especially over the last six months, the
delay of $400 million in new loans from its original schedule
this month will not likely make a significant dent in Indonesia's
international reserves. But it would be ill-advised for
Coordinating Minister for the Economy Rizal Ramli to put down the
issue simply as a deferred flow of reserves to strengthen the
balance of payments. True, with more than enough international
reserves to cover six months of imports, any new disbursement
from the IMF bailout fund would serve mainly as a second-line
defense for the external balance.

More devastating would be its impact on the already shaky
market confidence in the government's ability to follow through
with its sorely needed reforms, without which the budding
economic recovery would remain fragile, making it more difficult
and much longer for the country to get out of its present
multidimensional crisis.

The delay, officially announced on Friday after a two-week
review by the IMF on the reform measures, only confirmed the
warning reportedly conveyed through a letter sent to the
government early last month by IMF deputy director for Asia and
the Pacific Anoop Singh. Through the letter, the contents of
which were leaked late last month by the Hong Kong-based REVIEW
weekly news magazine, the IMF demanded that the government move
decisively to minimize risks in its fiscal decentralization plan,
use higher oil revenues to repay government debt and set a firm
timetable for asset sales by the Indonesian Bank Restructuring
Agency.

The delay, the second after the one in April was also caused
by the government's failure to meet its reform targets, will no
doubt hurt the credibility of Abdurrahman's new economic team,
headed by Rizal and Minister of Finance Prijadi Praptosuhardjo,
who were both handpicked by the President in August.

On the same day the bad news from the IMF was confirmed, Bank
Indonesia revealed that consumers and manufacturers were less
optimistic about the future outlook of the economy, which might
indicate that the economic performance in 2001 will weaken. Bank
Indonesia found in its November consumer confidence survey a
decline in both consumer and investor confidence in the economy
for the next six to 12 months. This means that both the demand
and supply sides will contribute to the slackening pace of
economic recovery.

The report predictably attributed the declining confidence to
the lack of public confidence in the government's economic
recovery program, the weakening of the rupiah's exchange rate to
the U.S. dollar, the steadily rising interest rate and the
stronger inflationary pressure.

Businesses obviously tend to slow down in making new
investments because of the expected higher interest cost due to
inflationary pressure and the weakening of the rupiah, which has
fallen more than 25 percent from its January level.

The lower confidence, combined with persistent political
fighting within the government, is feared to curb the robust
growth of export, which has just joined consumer demand (private
consumption) as the main locomotive of economic growth in the
third quarter.

The ominous messages both from the IMF and central bank's
survey should jolt the government into the hard reality that the
nascent economic recovery could quickly stall if market
confidence does not take root. The economic team, which seems to
have been lulled to the point of complacency by the 5.2 percent
growth in the third quarter, should realize that economic reform
is still far from complete to secure a sustainable cycle of high
growth.

The core structural challenges remain the same: asset
recovery, corporate (debt) restructuring and fiscal
consolidation. Without fast and significant progress in these
areas, the weak banking industry, which is the main pipeline of
lifeblood to the economy, will remain vulnerable.