IMF: Setting the record straight

IMF: Setting the record straight

Despite measures taken and assurances given by the government,
the market has not responded in a positive manner to the steps
taken so far to ease the current economic crisis. Economist Mari
Pangestu of the Centre for Strategic and International Studies
looks at the crisis' possible underlying causes.

JAKARTA (JP): Let's set the record straight on the role of the
International Monetary Fund (IMF) in the current Indonesian
economic crisis. The first IMF package was intended to shore up
the decline in market confidence, which saw the rupiah drop from
Rp 3,000 to Rp 4,000 (how high that seems now) from mid-September
to the first week of October.

The package's US$43 billion -- much more than expected -- and
the agreement itself appeared to restore confidence, with the
rupiah strengthening to the Rp 3,200 to Rp 3,500 level. The
reforms, while not taking action on some of the country's "sacred
cows", was at that time still viewed positively. The market was
still apparently giving it the benefit of the doubt.

However, the confidence crisis became progressively worse in
November as it became evident that it was business as usual with
exceptions being made, such as resurrecting a liquidated bank
and unshelving canceled projects.

The crisis of confidence worsened due to a perception that the
government was not managing the crisis effectively. The rupiah
resumed its fall from Rp 4,000 to Rp 6,000 against the U.S.
dollar. The market's negative reaction to the draft budget
outlined by President Soeharto on Jan. 6, which brought the
rupiah to below the Rp 10,000 level, should not be seen as a
turning point in the confidence crisis. It was only yet another
signal of the erosion of confidence in the government's ability
to lead, and of the deepening crisis in the banking and private
sectors.

While one can debate some specifics of the IMF policy, the
main problem, it would appear, was not the IMF or the medicine it
doled out, but the patient who did not fully swallow the
medicine.

Again we went to the IMF a second time for the same reasons --
to restore confidence -- and this time the reform package was
undoubtedly comprehensive with its specifics announced publicly.
The reforms included items on the wish list of market analysts,
economists and probably parts of our own public -- they were not
forced IMF conditions in that sense. Most important, the import
monopolies, cartels and national programs that could no longer be
subsidized were all included in the package.

Still the market has not responded positively. Should we be
surprised? No, since the cause of the confidence crisis -- the
issue of implementation and credibility of a crisis management
team -- has not been resolved.

The statements that have followed the announcement and the
credibility of the new dream team were questioned by the market
even before reform implementation has been able to start. This
time the market does not want to give it the benefit of the
doubt.

Once again market reaction was not positive when the
government tried to clarify the leadership issue over the last
two days.

The crisis of confidence has been perpetuated because the
patient appears not to be willing to take the medicine and wants
to play doctor when the situation has already become dire.

This is about what we should do ourselves domestically to
restore confidence. Without this, it does not matter what form
the IMF medicine comes in to heal our economy. The issue is also
not about how the funds from the package have been spent because
only a small amount has been used to stabilize the rupiah and the
funds will not be forthcoming if the patient does not take the
medicine.

Furthermore, if we are able to restore confidence -- including
restoring the government's credibility -- and implement the IMF
reforms, we may not need all of the funds. Mexico only used half
of the funds it borrowed.

Let us not blame the IMF, globalization or speculators. Let us
begin by looking closer to home.