IMF's reform package will be costly

IMF's reform package will be costly

The International Monetary Fund (IMF) has finally agreed to
provide Indonesia with a reform package comprising of financial
assistance and a set of policy measures to overcome its economic
problems. Economist Kwik Kian Gie takes a close look at this
package.

JAKARTA (JP): The US$23 billion package of financial
assistance being offered to Indonesia is significant, far
exceeding that received by Thailand.

More surprising is that there are countries standing in line
to express their commitment to providing bilateral aid for
Indonesia. The total has yet to be determined but some believe
that aid from those countries, along with the IMF's assistance,
may reach $30 billion to $40 billion.

Everyone is satisfied because we had anticipated the aid
package even before the government announced it on Oct. 31. If
this article sounds critical, it is merely aimed at searching for
clarification, seeking a proportional solution to the problems
and taking on board its educational value.

The package is costly because it will inflate our foreign
debt, which is already the world's largest. Furthermore, we will
have to sacrifice our dignity as we will see our ministers
supervised by IMF, World Bank and Asian Development Bank (ADB)
officials.

The package raises questions on the large amount of financial
assistance and its utilization. Why should Indonesia, whose
economic fundamentals are said to be sound and whose foreign
exchange reserves are more than US$20 billion, need a larger
amount of aid than Thailand?

Thailand, which spent all its foreign exchange reserves in a
vain attempt to prop up its currency and whose economic
fundamentals are poor, has accepted a commitment of only $17.3
billion. Also, no other countries have pledged bilateral aid.

Both the Indonesian government and the IMF in their weekend
announcements, however, failed to explain the details of the use
of the funds.

We can assume that the highest priority for the aid is to
strengthen the rupiah. Rumors say the aid could even be used to
raise the rupiah's value to a purchasing power parity of about Rp
2,800 even though the IMF, the World Bank and the ADB would not
dare to mention the purchasing power parity level.

Another question will then arise: "Will the funds be used to
intervene in the foreign exchange market everyday?" If the answer
is "yes," does it mean that the government will no longer float
the rupiah value in line with the market mechanism, but tie it
tightly to the value of the dollar, as it did before? Such an
explanation is necessary to prevent speculators from playing
around with the rupiah.

If the government really means to use the funds for market
intervention, will the funds be adequate? Will such intervention
not be too expensive as it will mean that we increase our debt
burdens and raise our current account deficit?

As Indonesia's current account deficit has been one of the
main causes of the present monetary difficulties, I would
recommend against the government taking on such an ambitious
plan. Intervention should be merely aimed at stabilizing the
rupiah's value against the dollar at an acceptable level, while
the aid can just be used as a stand-by fund for psychological
shock therapy.

If the aid were to be exhausted in propping up the value of
the rupiah, we might end up with a bigger economic crisis in the
medium term because the current account deficit will increase
further.

Another aim of the aid package is to restore investors'
confidence in doing business in Indonesia. But this will be
difficult because international financiers have been disappointed
by many Indonesian debtors defaulting on their debts, and so have
marked up costs.

Business confidence in Indonesia is unlikely to recover in the
next three years because international investors know that
Indonesia is entering a recession and that the IMF's reform
package is constrictive by nature.

Constrictive measures are regarded necessary even though the
government will have to violate some principles of the State
Policy Guidelines. The government, for example, has announced
that in the coming fiscal years, it will adopt a budget with a
surplus of about 1 percent of the Gross Domestic Product (GDP).
This means that the government will no longer abide by its own
balanced budget policy. The government will also aim to lower the
country's current account deficit to less than 3 percent of its
GDP.

As the government anticipates a decline in the country's
economic growth in 1997/98 and 1998/99, foreign investors might
prefer to wait for three years before making new investments in
the country.

The aid package also causes us to question whether it is
necessary for the IMF, World Bank and ADB officials, who are
generally younger than Indonesian technocrats, to supervise our
ministers. Sources from donor countries, however, said that they
are not sure that the Indonesian government would fully implement
the reform package.

As all the reform measures set by the IMF are similar to
proposals raised by Indonesian experts over the past years, the
younger generation should accept this event for its educational
value so that they improve discipline and integrity, avoid
corruption and appreciate the ideas of domestic experts.