IMF vs Indonesia, a dangerous game?

The disagreement between Indonesia and the IMF has come to resemble a cat-and-mouse game, with Indonesia looking to stabilize the rupiah without becoming ensnared in its commitment to reform and loosing out on the US$43 billion bailout cheese!

Steps toward stabilizing the rupiah began with the announcement about introducing a currency board system. However, the government did not reveal detailed information on the mechanics and finance of the proposed system, or on how it intended to use IMF rescue funds.

The IMF and financial markets were led to believe that a significant portion of loans granted by the international community were going to be used to support a currency board. In the face of existing economic and financial realities, it is possible that minimum foreign exchange reserves of US$60 billion to $70 billion would be required to support such a system.

Failing to restore public confidence in the rupiah while holding insufficient foreign exchange reserves would lead to a collapse of the exchange rate. Since all rupiah in circulation must be fully backed by foreign exchange reserves, depletion of those reserves would theoretically mean that no rupiah could remain in circulation. Indonesia would then have to revert to a barter economy, which is simply unthinkable.

When the idea of a currency board was first floated, its proponents must have known that implementation without IMF support would be impossible. It can only be assumed that the real purpose of the currency board announcement was to test the reaction of the IMF.

Indonesia then reconfirmed its commitment to the 50 point IMF reform plan, but suggested implementing a watered down version of the original currency board plan. This set of reforms and currency stabilization measures has become known as IMF-Plus. Again, public information about this system has been very vague.

An IMF-Plus system which grants unrestricted access to dollars at an unrealistic exchange rate is out of the question. Selective U.S. dollar access and strict monitoring and enforcement would be required for this system to succeed.

While many still advocate a currency board system, stalemate has been reached in the cat and mouse game.

The IMF, by delaying discussion of the reform program until April, has effectively withheld the next $3 billion installment of assistance, which was originally due on March 15.

A spanner was thrown in the works by Indonesia's rather belated assertion that the IMF package was not in line with the "family principles" of economic management stipulated under Article 33 of the Constitution and that introducing the reforms would undermine national dignity.

Then a further twist was added to the tale when a central bank team canceled a stop-over in Buenos Aires last week, which had been planned to follow meetings with Chilean officials in Santiago.

Although Argentina has run a currency board system since 1991 and has often been held up as role model for Indonesia, closer scrutiny of her economy reveals severe economic problems and an overvalued, albeit stable currency. Perhaps an insight into these troubles prompted the Indonesian delegation to abandon notions of using Argentina as a model and cancel their Buenos Aires visit.

No matter how unpalatable the reform measures may appear, Indonesia and the IMF must put the rescue package back on track if any further deterioration in the situation is to be avoided.

Both parties must avoid turning the issue into a confrontation, since the concessions which must be made now will be immeasurably less costly than reconstructing a collapsed Indonesian economy in the future.

JOSEPH LOUIS SPARTZ

Jakarta