IMF pleased with Indonesia's recovery

JAKARTA (JP): The International Monetary Fund (IMF) Asia Pacific director, Hubert Neiss, said on Wednesday that Indonesia had made considerable progress in economic recovery, but warned that a consistent implementation of the economic reform program was a must to sustain recovery.

"Indonesia has made considerable progress in the economy and recovery, but the most important challenge is whether the government will continue to nurture the recovery and continue the institutional and structural changes in order to sustain it," he told a seminar on Indonesian economy.

The seminar also presented other distinguished speakers, including U.S. Massachusetts Institute of Technology economist Paul Krugman, Bank Indonesia deputy governor Miranda Goeltom and local economists Marie Pangestu and Sjahrir.

Neiss said that the country's economic reform program was so far effective as reflected in the strengthening of the rupiah to the U.S. dollar and other positive macroeconomic developments.

"The economy has started to grow again," he said.

He added, however, that the country's economic recovery was not yet broad based.

Neiss pointed out that the banking sector had yet to recover from its ailing condition and the corporate debt overhang was still a big problem to the economy.

Neiss also acknowledged that the Bank Bali scandal was a setback to the recent improvement in market sentiment, but said that this could be overcome if the government solved the problem swiftly and transparently.

The Bank Bali scandal has prompted several politicians to urge the government to revise its banking reform policy, particularly in regard to the blanket guarantee program.

Several economists have also warned of the likelihood of the new government to revise the IMF-mandated economic reform programs.

The Fund is organizing a US$43 billion bailout fund for the country to help finance the economic reform programs.

The Fund forecasted in July that the economy would grow between 1.5 percent and 2.5 percent in the current fiscal year ending in March 2000.

Indonesia was badly hit by the economic crisis that started in the middle of 1997. The economy contracted by nearly 14 percent last year, inflation soared to more than 77 percent, the central bank's benchmark interest rate skyrocketed to 70 percent and the rupiah plunged to about Rp 14,000 to the dollar.

But the economy started to grow by 1.82 percent in the second quarter of this year compared to the same period last year. The economy has also been enjoying deflation since March, and the rupiah has been hovering between Rp 7,000 and Rp 8,000 to the U.S. dollar over the past several months.

National Development Planning Board (Bappenas) chairman Boediono painted a more optimistic picture of the economy on Tuesday, predicting that gross domestic product (GDP) would grow between two and four percent in the current fiscal year, and up to six percent in the next fiscal year.

But Krugman warned of such overoptimism.

He said that compared to other crisis-hit countries in the region, the Indonesian economy was the worst hit.

He pointed out that while other crisis-hit nations suffered "financial distress," Indonesia suffered "financial collapse".

He added that while the economic meltdown had sent only a couple of major corporations into bankruptcy in other nations, "most corporations in Indonesia went bankrupt".

Krugman said that Indonesia's economic recovery would not be as fast as the government expected, but it would be "gradual".

He also suggested that a clean and legitimate government was crucial to attain an economic recovery.

"That (recovery) depends above all on having a government that is reasonably fair, honest and legitimate. If not, Indonesia will be lagging far behind other countries," Krugman said.

"We hope to hear good political news from Indonesia," he said.

He noted that the recent positive economic development was also helped by positive developments in the international economy, which was not primarily due to the IMF programs.

Sjahrir agreed that a legitimate and clean government was crucial for the country's economic recovery.

"Habibie is far from the criteria set by Krugman, but Megawati is closer," he said, referring to incumbent President B.J. Habibie and popular opposition leader Megawati Soekarnoputri, the leader of the Indonesian Democratic Party of Struggle (PDI Perjuangan), the front-runner in the June elections.

Asked to project an outlook for the Indonesian economy under a Habibie-led government and a Megawati-led government, Neiss said: "I don't know. The IMF is not in the business of political forecasts." (rei)