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.