INFID's sweeping criticisms

INFID's sweeping criticisms

Rejecting the Indonesian government's reform agenda as
generally useless seems to be a pointless criticism that doesn't
deserve any attention from the economics ministers, especially
because the critics didn't come up with alternative policy
recommendations.

Yet we see it necessary to comment on the sweeping criticisms
made by International NGO Forum on Indonesian Development (INFID)
last week, which demanded the government drop the reform programs
it announced in a White Paper last September.

The reform agenda, which will replace the International
Monetary Fund (IMF) program later this year, is by no means the
best way of improving the welfare of the people, alleviating
poverty.

But what is the point for INFID to attack as useless the
reform measures that have gone through a national political
consensus in the House of Representatives if it simply stopped
short of suggesting better, more realistic, alternative programs.

Given the fragile economic condition and in anticipation of
heightened political emotions next year, the government doesn't
have much choice but to continue to push through the big backlog
of reform measures designed to strengthen macroeconomic
stability, further restructure the financial service industry and
stimulate investment, exports and job creation.

These programs certainly do not directly reduce poverty, nor
will they immediately cut down the stocks of government debts.
But how could we talk about poverty alleviation and reducing
government debts if the economy did not grow. The economy will be
able to grow only if there is a minimum degree of macroeconomic
stability with the inflation and exchange rates fairly stable to
allow for reasonable calculation of business risks.

Credit interest rates will not go down if inflation is not
controlled, and banks will remain highly averse to new lending if
the business risks are persistently very high. These are some of
the issues that are being addressed by the reforms stipulated in
the White Paper.

Other measures include reforms in customs and tax services,
legal sector, licensing system, improvements in basic
infrastructures, regional regulations and anti-corruption
measures and in other trade-facilitation and business-support
services, all designed to stimulate investment, export and job
creation.

All these measures are needed to maintain macroeconomic
stability and to fuel a stronger recovery in order to generate a
larger number of jobs to absorb the huge number of unemployed and
new entrants on the labor market.

If most of these measures will be useless, as INFID claims,
are there better, alternative measures that are workable under
the current conditions?

True, high growth will not automatically reduce poverty if the
government does not enhance a more equitable distribution of
income and implement better targeted poverty alleviation
programs.

But nothing else will happen if there is no macroeconomic
stability and a fairly high economic growth. One must also
remember that what the government is doing and will do in the
economic sector next year is still very much crisis management.

INFID lambasted the government for allocating more than US$8.1
billion on foreign debt principal and interest payments next
year, thereby leaving meager sums for operating and development
budgets and for financing social safety-net programs.

Is INFID so naive that it does not realize that the heavy debt
service burden was caused by the national political consensus not
to renew the IMF program?

Since Indonesia decided not to renew its program with the IMF,
the country will be deprived of access to debt-rescheduling
facilities from the Paris Club of sovereign creditors and will
automatically enter the IMF Post-Program Monitoring (PPM)
mechanism because its debts to the multilateral agency are far in
excess of its borrowing quota.

But this PPM does not mean that Indonesia remains under IMF
special arrangements and is therefore still eligible to another
debt-rescheduling facility from the Paris Club, as INFID claims.

Every member that owes the IMF more than 100 percent of its
quota but decides to end its IMF program automatically falls
under the PPM. This simply makes sense since a big borrower
indeed requires special supervision.

That is why both Thailand and S. Korea, which had earlier
graduated from the IMF programs, did not abruptly terminate their
special arrangements with the IMF but instead made a gradual
exit, first by opting for a precautionary arrangement, then
entering the PPM, before finally paying up all their debts to the
IMF.

Also contrary to INFID claims, Indonesia is not entitled to
the heavily-indebted poor countries (HIPC) initiative of the
Group of 8 (G-8) developed countries. Even though this initiative
was improved at the G-8 summit in Evian, France, last June,
this scheme is open only to low-income countries, which have
completed their poverty-reduction strategy papers. Indonesia is
already classified as a middle-income country and is still
working on its poverty-reduction strategy paper.

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