IMF worried over crisis in Indonesia

IMF worried over crisis in Indonesia

WASHINGTON (Reuters): IMF officials on Tuesday called Indonesia's economic crisis worrisome and faulted the Jakarta government for failing to follow through on pledges to restructure the nation's economy, the Washington Post reported yesterday.

"We would like to see the senior leadership in Indonesia stand up and be counted on the reforms," the newspaper quoted a senior International Monetary Fund official as saying.

"I think the markets are asking themselves the question of just how much the senior Indonesian leadership is committed to these programs and particularly to the major reform measures that affect the family" of President Soeharto, the official told the paper.

Indonesia, which agreed on an IMF-led bailout of over $40 billion in October, has seen its currency continue to decline sharply despite the rescue package. The Jakarta government also announced a budget on Tuesday that failed to meet targets set by the IMF under the bailout deal.

The rupiah's continued declines are raising the prospect that Indonesia's bailout package will have to be supplemented or altered in some way, the officials said.

One possible outcome is the IMF, which disbursed $3 billion in loans to Indonesia in November, will refuse to approve a second installment of $3 billion that is scheduled to be advanced in mid-March after a review of Indonesia's performance.

The Post quoted one IMF official as saying: "It will be a key moment for all of us -- not just the Indonesians, but all of us trying to think through how to deal with this situation successfully."

Indonesia announced a Rp 133.5 trillion rupiah budget for the year beginning April 1, setting an increase of 32.1 percent in government expenditures and revenues from the current budget, disappointing analysts and financial markets.

Markets voted with their feet after the budget. The rupiah plunged to a fresh low of 8,200 in early trade yesterday and the Jakarta stock market index opened more than one percent down at just under 400 points.

Analysts said projections of four percent economic growth, inflation at nine percent, the rupiah at 4,000 to the dollar and an increase in tax revenue during the period were difficult to achieve given the depth of the crisis.

In Hong Kong, Asian fund managers said yesterday Indonesia's failure to table a credible 1998/99 budget was expected to spur a second round of negotiations between Jakarta and the IMF.

"(IMF managing director) Michel Camdessus is a strict disciplinarian," said Marshall Mays, chief strategist at Nikko Research Centre in Hong Kong. "He won't flinch. He'll come back and say 'This is it. No more money. Your next tranche sits in the bank.'"

Some Asian analysts said the budget revealed that the Indonesian government considered IMF discipline a secondary concern to the risk of social disturbance prior to March presidential elections.

"Indonesia is backing away from the table and saying, we cannot do this," said Mays.

Chris Tinker, head of regional economics at ING Barings, said that with its budget, Indonesia was following a path already traveled by IMF recipients South Korea and Thailand -- back to the agency's doors with a plea for leniency.

He said that balancing the budget in a debt-laden economy confronting mass bankruptcies and a collapse in consumer demand would be extremely difficult, and achieving a surplus under these conditions was highly unlikely.

The IMF will not want to be seen to be backing down from its original requirements, but probably underestimated the social risks of the economic plan agreed to in October, Tinker said.

"But unfortunately, trying to force the issue in the current climate where most of corporate Indonesia is effectively bankrupt is just something that has huge socio-economic consequences which the IMF had no anticipation of provoking."

More than two million workers have been laid off and civil servants have been denied even an inflation-indexed pay increase.

But Mays argued that rather than genuine labor riots, Indonesia was now at risk from social unrest provoked by powerful interest groups willing to pay peasants to stir up trouble in a bid to resist economic reforms.

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