IMF loses momentum in helping RI

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.