IMF loses momentum in helping RI
The economy continues to deteriorate while the International Monetary Fund dithers over when it will disburse the next tranche of its bail-out fund for the country. Economist Kwik Kian Gie discusses its impact.
JAKARTA (JP): IMF Asia-Pacific director Hubert Neiss has been busy working out the formula to help restore Indonesia's ailing economy. Neiss, who left the country for Washington two weeks ago to report to the fund's executive board, returned last Wednesday.
Unlike on previous visits, Neiss held meetings with nongovernment figures, mostly politicians, to learn about the situation in Indonesia since the May 21 resignation of former president Soeharto.
This indicates that the IMF, which never interferes in a country's political affairs, is now trying to weigh up the political future of this country.
But Neiss has kept the IMF's next step obscure. He was quoted by Bisnis Indonesia as saying that the next tranche of the IMF's aid for Indonesia was likely to be disbursed next month. But he said the decision would be made by the fund's executive board.
More confusing is his recent statement that he would first study the latest conditions in Indonesia, indicating that almost all the assumptions the IMF had used to make its past decisions are now changing. Does it mean that all or most of the agreed points in its reform programs will be changed?
Why does Neiss need to come to Jakarta again and again to make these studies? If he sticks to the old matrices but wants to follow hour-to-hour political developments in Indonesia, he is likely to become perpetually confused in writing reports to Washington given the rapid social and political changes.
The basic question now is whether the IMF and its donors will disburse the remainder of their pledged aid of US$43 billion in bulk or in small doses to help Indonesia overcome its pressing economic problems.
If the IMF sustains such procedures, the effectiveness of its assistance to overcome Indonesia's economic difficulties is questionable. In almost a year it has disbursed only the first tranche of its aid. Most of the time has been used ferrying, at great expense, its staff to and from Jakarta, while there has been "no action but talking only" (NATO).
Meanwhile, the economy continues to deteriorate with the annual inflation rate rising to more than 100 percent, a lot of factories closing down and the number of unemployed people increasing to 20 million. The danger of starvation is lurking, forcing the country to import three million tons of rice.
Many ethnic Chinese entrepreneurs have lost their businesses after their shops were vandalized in the mid-May rioting, while some of them have left the country. Many good professionals prefer to stay and look for jobs in countries where they have graduated.
The IMF has made many mistakes so that it has lost much of the momentum to help overcome Indonesia's economic difficulties.
The IMF, for example, failed to help strengthen the rupiah when it considered the currency's equilibrium value Rp 5,000 to the U.S. dollar -- before being revised downward to Rp 6,000.
It was still convinced the rupiah would strengthen if the reform programs were accomplished. But events have proven it wrong and the rupiah fell further, to Rp 15,000 on June 11.
Had the IMF, as I suggested in my article on Feb. 23, disbursed $20 billion of its aid then, the rupiah would then have strengthened to Rp 5,000 per dollar and investors would have repatriated their dollars again into Indonesia.
The fatal decision of the IMF was the closing down of 16 insolvent private banks without a full guarantee on the return of their depositors' funds in October. This drove depositors to rush on other private banks to cash in their savings and move them to state-owned and foreign banks.
The government's announcement on the full guarantee of savings came too late because the central bank was forced to print money -- more than Rp 100 trillion ($7.7 billion) -- for bailing out the banks affected by the rush.
Panicked by such developments, Bank Indonesia raised interest rates on its short-term promissory notes, SBIs, to up to 58 percent, thereby driving commercial banks to increase lending rates to about 60 percent to 70 percent a year. As a result, companies highly dependent on loans were forced to close down.
The IMF's reform programs are aimed at abolishing market distortions but it fails to introduce emergency programs to push up the rupiah's value. This is like trying to mend a broken house but the ailing patient in it is left without any efficacious drugs. As soon as the house is mended, the patient dies.
What Indonesia needs is a national leader who can invite the people to sustain further suffering while struggling without precipitating social unrest. B.J. Habibie seems to be unable to do this. If he stays much longer, social explosions are likely to erupt. So, it is becoming an urgency to replace the national leader.