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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