IMF disburses loan

The government should not let the high commendations of the International Monetary Fund Executive Board in its seventh review of Indonesia's policy performance last week go to its head, let alone feel complacent and relaxed with regards to its reform implementation.

The IMF completion of its review of Indonesia's performance under a SDR 3.63 billion (US$4.8 billion) Extended Fund Facility arrangement that was signed in February, 2000 with high commendations should indeed be welcomed as a new positive factor that will improve market confidence in the government and the country's economic policies.

The board's approval last week of the new reform agenda the government submitted in its seventh letter of intent (LOI) in the third week of November will similarly bolster the market sentiment toward macroeconomic stability because the endorsement opened the way for the release of a further SDR 275.24 million ($365 million) of the facility. The new LOI itself is the third supplement to the 53-point reform agreement that was signed with the IMF in December, 2001.

The biggest positive impact of the IMF endorsement of Indonesia's new reform agenda is not resulting from the loan disbursement as the loan will serve only as a second-line defense in the country's balance of payments but from the positive signal it conveys to the market that the country's reform agenda is moving along the right track.

The IMF did praise what it sees as important progress in reform implementation that has contributed to marked improvement in macroeconomic fundamentals.

However, the multilateral agency also warned of the deteriorating economic outlook as a result of the Oct. 12 terrorist bomb attack in Bali, stressing the importance of continued firm execution of reform programs.

The IMF representative in Jakarta David Nellor reiterated the warning in a statement on Wednesday, strongly suggesting that the government show stronger resolve in carrying out all the reforms needed to remove the woes that are deeply rooted in the economic crisis.

Policy coherence and consistent implementation of reforms are imperative not primarily because they are a condition attached by Indonesia's international creditors (Consultative Group on Indonesia) to its new loan and commitments.

Both the IMF and the creditor consortium share the view that without significant progress in banking, corporate, legal and judicial reform and in the establishment of the rule of law as well as the privatization of state companies -- which form the core of the reform agenda -- no amount of foreign loans or grants can help Indonesia get out of its economic crisis.

The continued recovery of bank and state enterprise assets are an important element of the government's strategy to reduce the level of public debt and consequently the sovereign risk and to improve the efficiency of the private and public sectors. Accelerated progress in implementing legal and judicial reforms and the rule of law is critical not only to improve governance but, more importantly, to reinvigorate the investment climate.

It is private investment, both domestic and foreign, that has been and will continue to be the driver of economic growth. The role of official foreign loans and grants is limited to helping the government manage its budget deficit at a sustainable level and to being a catalyst with regard to maintaining international confidence in the country. The government's resource capacity will also be severely restricted at least for the next five to seven years due to its huge debt burden.

Private investment should therefore be reinvigorated by carrying out the reform measures described above.

All the basic requirements to stimulate private investment have been covered by the reform agenda. Private investors are fully aware that many of the reforms cannot be completed overnight. What they want to see is consistent implementation and policy coherence.

Moreover, the government has only one year remaining, before the IMF facility expires next December, in which to prove to the market that it is truly determined to push ahead with its structural reforms with or without the multilateral agency constantly looking over its shoulder.