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.