Indonesia's top priorities

Indonesia's top priorities

Minister of Finance Boediono was not exaggerating when he said
on Monday that Indonesia faced a new round of crisis if it failed
to maintain the pace of reform after the IMF-sponsored economic
program ends later this year, botched next year's elections or
allowed its territorial integrity to be compromised.

He rightly asserted that these three concerns should be the
top priorities for the Unitary State of the Republic of Indonesia
(NKRI). Having said that, Boediono did not by any means intend to
join in on the chorus of the NKRI anthem that has been sung time
and again over the last five weeks of military operations in
Aceh.

It is by no means the style of the hardworking Boediono to
mince words when it comes to an acronym like the NKRI. By using
the acronym, the minister was emphasizing his point that the
entire nation -- meaning all of the people, the central
government, regional administrations and the two other branches
of government that make up the NKRI -- must join hands in
ensuring no new crisis hits the country.

Take, for example, the strategy of managing national reform
programs and maintaining macroeconomic stability when the IMF
program ends later this year.

Opting for a complete termination of the IMF program, as most
politicians, many analysts and several Cabinet ministers have
demanded, would cause a financing (fiscal gap) and credibility
gap.

The fiscal gap would arise because without the IMF, the
government would be deprived of the opportunity to receive
another round of debt rescheduling from the Paris Club of
sovereign creditors, thereby adding at least US$3 billion in
annual foreign debt servicing to the state budget. And this does
not include the consequences of this on the size of our foreign
reserves and its impact on the rupiah exchange rate.

The government, therefore, should devise programs that are
credible to the market to cover this additional burden and manage
our external balance. However realistic and credible the
programs, which are being designed by the finance ministry, they
would be rendered less effective if they were not fully supported
by every single component of the NKRI.

Any well-designed program would likely be doomed if the entire
government did not maintain budget discipline, as the recent case
of the procurement of jet fighters and helicopters from Russia
demonstrates.

Likewise, tax revenue will not increase as much as expected to
plug the hole in the budget and exports will not expand to
strengthen the balance of payments if local administrations
pursue policy measures detrimental to sound business operations,
or if the customs service does not improve its competence and
minimize corruption within its ranks.

The issue of credibility is perhaps the biggest challenge
facing the government after the end of the IMF program, given its
past record of delaying or backtracking on reform commitments.

The three branches of government must therefore convince the
market that the pace of national reform will continue even
without the direct oversight of the IMF. Failing to approve a
bill on schedule, as the House of Representatives failed to do so
with the draft legislation on amendments to the anticorruption
law on Monday, is inimical to market confidence.

Hence, Boediono is again quite right in attributing the
current macroeconomic and monetary stability largely to
increasing market confidence. This factor has created a virtuous
cycle within the economy -- a strengthening rupiah, lower
inflation, declining interest rates, bullish stock exchange and
an improving fiscal balance as a result of decreasing interest
burdens on domestic debts.

This market confidence has increased not so much because of
significant improvements in the fundamentals of the economy, but
because investors and businesses perceive that the reforms are by
and large on the right track and the progress, though
incremental, steady. After all, confidence feeds on a clear
direction.

Similarly, fair and smooth general and presidential elections
in 2004 would bolster market confidence in the country because
such elections would maintain political stability.

Though the government is fully responsible for holding the
elections, they would be doomed to failure without the full
cooperation of all of the components of the NKRI.

For example, if the House does not complete on schedule all of
the laws that will govern the elections or if the police and
military cannot provide a peaceful ballot, political stability
will be damaged.

But what business is it of Boediono, as the finance minister,
to talk about territorial integrity as the third most important
item on the nation's agenda? His remarks, we believe, convey an
implicit warning to the military not to botch up their operations
in Aceh.

If the operations succeed in restoring order and stability in
Aceh, but in the process alienate the Acehnese from the concept
and true meaning of the NKRI, that would be devastating to
political stability and national unity, with similarly grave
damage to macroeconomic stability.

So, all in all, Boediono's remarks succeeded in accurately
outlining the most pressing items on the nation's agenda.