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.