IMF final review
IMF final review
A special team from the International Monetary Fund completed last week its final review of Indonesian economic reform programs under its US$5 billion Extended Fund Facility, with high commendation, praising the government's macroeconomic management, continued fiscal consolidation and significant progress in structural reforms.
The successful review means that barring any major failings or backtracking on the reforms within the next few weeks, Indonesia will finally graduate from the IMF program by the end of next month, thereby ending more than six years of a turbulent relationship with the agency.
When Indonesia asked for IMF assistance in November 1997 it was meant only as a preemptive move to avoid the impact of contagion from the financial crisis in Thailand. But Indonesia turned out to be the most devastated by what is now referred to as the East Asian Economic Crisis, and the longest mired in that debacle. Thailand and S. Korea, two other East Asian countries severely hit by the crisis, completed their treatment at the IMF "crisis management" center more than two years ago.
Handling Indonesia's economic debacle might have been the most complex and difficult for the IMF. First of all, the agency has had to deal with four presidents over the past six years. Then, what started in late 1997 only as financial distress subsequently worsened into a multidimensional crisis as the country experimented with the democratic process of governance and decentralization of administration.
However, developments over the past two years have been quite impressive, as can be seen from the stronger macroeconomic stability. The pace of economic reform since August 2001 has steadily been much faster and policy stability much stronger, due largely to significant improvements in political and security stability.
The overall situation is nevertheless still rather fragile, as the financial services industry has yet to complete its operational restructuring, the pace of new investment remains very weak and consequently the rate of economic growth is far below what is required to absorb the huge number of unemployed people.
Complacency is certainly out of the question. The IMF warned last week that while key objectives under the IMF program had largely been met, important challenges remained.
The recent revelation of a lending scandal involving more than $200 million at Indonesia's second-largest bank, state-owned Bank BNI, shows how fragile is the state of the banking industry. Even though the industry had been restructured and recapitalized with almost $75 billion of taxpayers' money, it has yet to build up a stronger system of risk management and supervision.
Also worrisome is that the integrity and technical competence of Bank Indonesia's banking supervisory mechanism has yet to be enhanced.
The government has launched its reform agenda to replace the IMF program, which will end later next month. The international market seems to be comfortable with a long list of entirely homemade structural reforms, as stipulated in the government white paper issued last September.
Most of the measures, if properly implemented, will remove investment barriers, strengthen legal certainty and minimize excesses in the process of decentralization.
But the real test of credibility of the reforms will take place only next year when the reform programs will be implemented without legally binding, quarterly reviews by the IMF.
The market nervously waits to see whether the government is really determined to push through with all the reform measures it has pledged to execute, during what is foreseen to be a politically turbulent year in 2004 when the nation's more than 140 million voters will take part in three rounds of elections.
This will be quite challenging indeed, because many of the measures are normally politically unfeasible, as they are painful, demanding more sacrifices from the general public.
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