Is there a future for Indonesia without the IMF?

Is there a future for Indonesia without the IMF?

Juergen Kaiser
Jubilee.De
Dusseldorf
Germany

Throughout the month of June Indonesia saw a quite lively
debate regarding its future relationship with the IMF. It has
been instigated by Planning Minister Kwik Kian Gie and it has
ended with the cabinet decision to extend the current arrangement
with the IMF for another 12 months till end 2003.

There is good reason to presume that breaking away from the
Washington institution has never really been considered by the
impressive bunch of hardliners, which has joined into Kwik's
rethoric (Vice President Hamzah Haz and People's Assembly
chairman Amien Rais). Most probably, Kwik's harsh words were
targeted at a domestic audience, which needed to be confirmed
that the government of Indonesia was not a puppy of Western
interests.

However, the ambiguous character of the maneuver does not
invalidate its content, particularly as former co-ordinating
minister Kwik knows what he is talking about. So the question he
raised, which are definitely worth answering are:

Is the cooperation with the Fund actually benefiting or rather
harming Indonesia?

Can there be a future for such a fragile economy as
Indonesia's without the inflow of new funds, which can only be
mobilized by the Fund, and nobody but the Fund?

At the outbreak of the Asian Crisis Indonesia found itself
before the alternative to either let its largely bankrupt banking
system go down the drain, or to use public funds to save it.

Counseled by the IMF, the predecessor administrations of
President Megawati decided to pile up a huge internal debt of the
state, which today amounts to roughly half of GNP in order to
recapitalize the actual banking system. The alternative would
have been to disrupt a large part of Indonesia's economic
activity by accepting the bankruptcies of practically all the
major Banks.

Subsequently the same state funds would then have been used to
finance a brand new credit industry under the control of the
state. Administrations had some reason to fear the consequences
of such a disruption and to rather do their utmost to keep the
existing system working.

The Indonesian state has had to pay a twofold price for this:

First it has left most of the Soeharto-era structures in the
financial web of the country intact. Had the state dared to use
the some $60 billion internal bonds to capitalize new
institutions which might have taken up the banking function, this
would certainly have caused major disruptions in the country's
economy. On the other hand it would have given the country a kind
of fresh start regarding its financial and entrepreneurial elite
- something which is painfully lacking, when nowadays even
cabinet ministers lament that the country's bureaucracy is
"corrupt to the bones".

Secondly, the recapitalisation of existing banks has
maneuvered Indonesia into a kind of debt trap. One of the merits
of the debate instigated by Kwik was to have highlighted some of
the most malign dimensions of this trap: As the recapitalisation
bonds bear interest in the range of 13-14%, they place a heavy
burden on the state budget. At the same time it has been an IMF
key condition, to privatise the banks and to use the proceeds
from these asset sales for closing existing gaps in the current
budgets.

This pressure to sell has lowered the assets' value to the
extent that in some cases the government can realistically expect
to receive less for their assets than what they still owe to the
sold institutions in the form of interest on the recap bonds.

Observers consider a recovery rate of some 30% of what the
state has actually invested as realistic. This, of course, is not
only due to high interest rates but also to the poor quality of
the recapitalized banks' assets. A perfect trap so: No (meager)
sales - no balanced budget - no new money from the IMF (and other
donors) - more budget problems.

While many - including the author - had felt that in 98/99
recapitalizing the banks had been an unpleasant but unavoidable
exercise, it now becomes clear that the government has put its
head into the noose, which now starts being torn tight. It has
been Kwik's merit, and those, who, for whatever reason, have
joined him, to at least have cried foul.