IMF's rebuff a warning to Indonesian govt

IMF's rebuff a warning to Indonesian govt

SINGAPORE: Support for the Indonesian government has reached a
new low, as demonstrated by the International Monetary Fund's
(IMF) decision to delay disbursement from its US$5-billion (S$9-
billion) loan program, pending economic reforms.

It refused to release a US$400 million loan tranche until the
Indonesian parliament approves revisions to the government's
Budget. Adding salt to the wound, the Japan Bank for
International Cooperation also canceled a 35.9 billion-yen (S$530
million) loan. It had forwarded to Indonesia a staggering 7.7
trillion yen -- half of which is currently outstanding -- in the
last 30 years.

Likewise, the World Bank canceled its US$300 million loan
earlier this year, citing poor program implementation. Clearly,
the collective lack of confidence in President Abdurrahman
Wahid's government leaves the economy dangerously exposed to
another meltdown.

Still, IMF's desire to avoid getting entangled in the
country's turbulent political situation is understandable.
Approving more loans to the country in such circumstances poses
unacceptable risks to IMF members, whose money is at stake, and
its reputation.

The IMF listed Indonesia's problems, such as rampant
corruption, a growing budget deficit, slow asset sales, legal
uncertainty and poor implementation of previously pledged
reforms. Its approval is crucial for the implementation of the
loans, grants and debt-rescheduling promised by other
international lending agencies which usually follow the IMF's
lead.

Without IMF support, Indonesia faces a vicious cycle of
economic and political instability. The economy is under pressure
because of political instability, which contributes to low
investor confidence. There must be a clean break from this cycle
if the Indonesian economy is to recover. The IMF's decision has
hurt the rupiah, which fell to below 12,300 late last week.

As the World Bank warned recently, Indonesia's budget deficit
could exceed 6 percent of the gross domestic product. Towards the
end of March, the deficit was Rp 53 trillion (S$8.1 billion) and,
in April, over Rp 70 trillion. Much of this comes from the
currency's rapid depreciation to way below the Rp 7,800 per
dollar level set in the budget, and from the government's
obligation to pay the cost of the bank recapitalization program,
worth Rp 650 trillion.

Speculators are not behind the rupiah's latest nosedive. On
the contrary, there is heavy demand for US dollars by
corporations with debt payments coming due in the next few
months. They are buying dollars now rather than wait as they fear
the rupiah could fall further.

Also, interest rates could spike if the central bank defends
the rupiah, which would blow the deficit wide open. The rupiah's
collapse comes from a lack of market confidence because of
endless bickering in the political leadership.

Fears continue to mount that supporters of President
Abdurrahman may stage a show of force with Parliament reconvening
yesterday to debate a second censure motion against him. He is
simply not willing to surrender, and neither are the opposing
camps willing to give in.

But even if President Abdurrahman is ousted, his successor is
unlikely to enjoy an easy ride, for Indonesia is now in a
permanent state of political uncertainty. Even if Vice-President
Megawati Soekarnoputri takes over as President, there is no
guarantee the crisis is solved. The country needs many, many
years to recover from the turmoil caused by its political elite.

-- The Straits Times/Asia News Network