IMF's ominous message

IMF's ominous message

Very few people would have missed the negative signal sent by
the failure of the International Monetary Fund (IMF) and the
Indonesian government to agree on a new reform accord last week,
however hard both parties tried to sugarcoat the unpleasant
reality with such comments as "we have completed the basic draft
of the letter of intent" and "we have reached a basic agreement
at the mission level".

The blunt reality is that this is the second thumbs-down the
IMF has given the government of Abdurrahman Wahid, after a
similar mission in mid-April also failed to revive the reform
agreement, which was held up last December.

The IMF high-level mission is simply not confident that the
present Cabinet is capable of executing the sorely needed reform
measures, given Abdurrahman's shaky political leadership. Hence,
what is the point of drawing up a contract that most probably
will not be honored.

Other than the impending impeachment of President Abdurrahman
by the nation's top legislative body, the People's Consultative
Assembly, in a special session early next month, there was really
no other good reason for the IMF not to revive the reform program
under a new letter of intent.

All the requirements that have held up the disbursement of the
third US$400 million tranche of the IMF's $5 billion since
January have been met. The government even backed down on what it
had said was the nonnegotiable issue of the planned central bank
law amendment, which would have led to the replacement of Bank
Indonesia's entire board of governors.

However, in order to avoid the impression of the IMF meddling
in politics, mission leader Anoop Singh, the IMF director of Asia
and the Pacific, insisted that the failure to reach an agreement
had nothing to do with the Assembly's special session.

But the IMF's first deputy managing director, Stanley Fischer,
hinted in Tokyo in the middle of last week that it was difficult
to predict when a final agreement could be reached, given the
political uncertainty in Indonesia and the lack of progress in
debt restructuring and the sale of nationalized banks.

Thomas Dawson, the director of external affairs at the IMF
headquarters in Washington, acknowledged over the weekend that
several details still needed to be worked out to reach a final
agreement. This indicated that things were not as smooth as
officials in Jakarta claimed.

But in another apparent attempt to avoid the impression of the
IMF trying to buy time, waiting for a new government to emerge
later next month, Dawson noted that "at the mission level, they
have reached a basic agreement ... with other details needing to
be worked out in Washington".

Since Indonesia joined the IMF bailout program in November
1997, we have never heard an IMF review team use the term
"mission-level agreement".

The review teams have always been headed by the Asia-Pacific
director, who is authorized to give a fiat on the spot (in
Jakarta) to a final letter of intent, which normally is approved
by the IMF executive board two weeks later. This process seems
normal, otherwise it would be a gross waste of resources to send
the mission to Jakarta. What would be the point of sending such a
high-level executive as Asia-Pacific director Singh to Jakarta if
the details of the agreement had yet to be worked out by the
board in Washington?

Although the IMF would certainly deny it, one cannot help but
get the impression that the fund seems uncomfortable with the
current finance minister, Rizal Ramli, a staunch critic who often
recounts in emotional outbursts what he sees as past mistakes by
the IMF in the early handling of Indonesia's economic crisis in
late 1997 and early 1998.

But the problem is that most of the reform measures to be
outlined in the letter of intent -- fiscal consolidation, bank
restructuring, corporate reform and asset sales -- fall under the
jurisdiction of the finance minister. So all in all, despite the
sugarcoated remarks used to describe the outcome of the latest
IMF review mission, a lot of things could still happen before a
final agreement is reached.

But one thing is crystal clear: the IMF is no longer confident
that the present government is capable of executing the reform
program, especially now when the political and macroeconomic
conditions are much worse than they were last year.