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.