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.