Indonesia has no alternative but to rely on IMF

Indonesia has no alternative but to rely on IMF

By Linda Sieg

TOKYO (Reuters): The International Monetary Fund has come under fire for making a bad situation worse in Indonesia but analysts say Jakarta has little alternative to reliance on the fund, no matter who rules the troubled nation.

Indonesian President Soeharto, bowing to domestic and international pressure, resigned on Thursday.

Vice President Jusuf Habibie immediately took his place, but analysts questioned how long the controversial Habibie could stay in power.

Risk remains, meanwhile, that tough reforms mandated by IMF bailouts in South Korea and Thailand could spark serious political unrest in those nations. But analysts say their greater progress towards political reform should help avert Indonesian- style turmoil.

Hailed as a savior when Indonesia turned to it for help last October, the IMF has since come under heavy criticism for setting too strict terms for its assistance and for failing to adapt its traditional prescriptions to Asian-style ills.

"In Indonesia, the method and timing of the broad structural reform policies included in (IMF) conditionality was too hasty and complicated the problem," an advisory panel to Japan's finance minister said in a report on the Asian crisis issued on Tuesday.

The IMF masterminded a $40 billion-plus rescue deal for Indonesia last October but twice had to revise the economic reform program linked to the bailout.

Fund defenders, however, say that while some criticism of the content of harsh IMF prescriptions is valid, an ossified Indonesian political system built up during President Soeharto's 32-year rule must bear most of the blame for the current chaos.

"When the crisis hit last year, the political system wasn't able to respond," said Bruce Gale, Singapore manager of Hong Kong-based Political and Economic Risk Consultancy.

Suharto's resignation on Thursday followed the death of more than 500 people last week, when the worst riots in three decades swept the Indonesia capital.

Economic collapse after years of booming prosperity ignited growing dissatisfaction with the inequalities and rigidities of Soeharto's regime, triggered the 76 year-old leader's downfall.

On Wednesday the IMF said it could no longer meet a June 4 target to pay its next loan installment and would have to reassess the economic assumptions underpinning the program.

Ultimately, though, Indonesia will have no alternative to relying on the IMF to help it out of its economic woes.

"Even a new government won't blame the IMF because they are going to need IMF support, and lots of it," Gale said.

Habibie was quoted on Thursday as saying he could honor all commitments with the IMF and continue promised reforms.

Analysts said the fund's reaction and the nation's worsening economic crisis would be key factors in determining how long Habibie stayed in power.

"It all depends on the economic situation. If there is no improvement in the economic situation and the IMF will not release the funds, then it will be very difficult no matter who comes up," Hilman Adil, director of the Center for Social and Cultural Studies in Jakarta, told Reuters Television (RTV).

The foreign investment community has reacted with distaste to Habibie's free-spending and unorthodox economic views in the past. "The IMF has actually specified some of Mr. Habibie's projects for condemnation in its reform program at various times," Gerry Van Klinken, professor at Sydney University, told RTV, adding the IMF was unhappy with Habibie's approach to economic policy when he was Research and Technology Minister.

IMF officials in Tokyo declined comment on Thursday.

But the World Bank said it was ready to resume operations in Indonesia as soon as the capacity to carry out economic reforms returned.

"We will be moving quickly in close collaboration with the IMF to restart operations as soon as we have a sense of the emerging players here," Dennis de Tray, the bank's director in Indonesia, told Reuters Television, adding the first priority for Jakarta was to form a credible and competent cabinet.

Risk remains, meanwhile, that Thailand and South Korea could suffer more social unrest and political instability as they move to implement more reforms agreed on with the IMF.

"At times when the economy is in recession there is always the risk of social unrest, and the risk that will spill into political instability for countries like Korea and even Thailand can't be ruled out," said Rob Subbaraman, an economist at Lehman Brothers Japan Inc.

Still, Seoul and Bangkok are seen as better positioned to avoid turmoil on an Indonesia scale.

"The strength of South Korea and Thailand is that they basically have governments in power that people have a certain degree of confidence in, and there is an agreed mechanism by which these governments can be held accountable," Gale said.