Sat, 26 Apr 2003


April 28, 2003

Exiting IMF program

There has been mounting pressure from economists, politicians and even some Cabinet ministers for the Indonesian government not to extend its program with the International Monetary Fund (IMF) after its expiry later this year.

These critics, of whom former chief economics minister Rizal Ramli is the most prominent, cite many mistakes allegedly committed by the IMF in its handling of the Indonesian economic crisis, especially between 1997 and 1999, that they claim led the country into an even deeper crisis.

It would indeed be a confidence-building achievement if Indonesia could successfully complete its program with the IMF later this year as scheduled.

That was what Thailand did in June, 2000 after it completed its 34-month Standby Arrangement with the IMF, succeeded in building up credibility for its commitment to consistently implementing reforms and immediately entered the IMF Post-Program Monitoring.

Different from Indonesia's current program (Extended Fund Facility) with the IMF that requires comprehensive, and sometimes acrimonious, policy reform review every quarter, the Post-Program Monitoring scheme only provides for frequent consultations with the IMF, in addition to the annual IMF Article IV review as part of its surveillance mechanism. The Thai government has since been free to design and sequence its reform programs without the IMF constantly looking over its shoulders.

True, as the local critics have asserted and many other international analysts have observed, the IMF made several major mistakes in 1997 and 1998 in its simultaneous handling of the economic crises in Thailand, Indonesia and South Korea.

But then, in retrospect, in so far as Indonesia is concerned, the blame should not be put squarely on the IMF alone. The IMF mistakes would not have been so devastating had then president Soeharto not so stubbornly resisted reforms to defend the vested interests of his family members and cronies.

Worse still, the government has often backtracked on its reform commitments or reversed measures deemed politically and socially unfeasible. And things have been complicated by the learning process in democracy and local autonomy. What had really happened in Indonesia is the sum up of mistakes piled upon mistakes of both sides -- the IMF and the government -- with each side's errors compounding the others'.

The basic question now is whether the government has gained international confidence in its political ability and leadership to consistently implement the reforms badly needed to lay foundations for a sustainable economic recovery.

Market confidence is quite crucial because right from the outset the IMF involvement in Indonesia has been designed primarily to get an international endorsement of its reforms, not for its loans, which cannot be spent to support the state budget anyway. The IMF money is meant only as second-line defense in the country's balance of payments.

Unfortunately, though, the government's records have thus far been not good enough to convince the international market that it will be able to consistently execute reforms without a punishment-and-reward mechanism that is now provided by the IMF.

Many instead are greatly concerned that the political commitment to take on reforms, notably the painful and unpopular ones, could waver during the election year in 2004 when the major political parties that form the current government and acquiesce to the temptations to pursue populist measures at the expense of the long-term good of the economy.

Both the government and the House of Representatives should therefore be extra careful with regard to the status of IMF involvement, analyzing its advantages and disadvantages and the impact of the program's termination on Indonesia's relations with its international creditors and the government's ability to get foreign debt rescheduling.

The biggest issue that needs to be addressed is how the end of the IMF Extended Fund Facility would contribute to building up a more effective and strong national leadership to accelerate the execution of the desired reform measures. After all, most of the reforms stipulated in the program with the IMF are precisely the measures that have to be implemented to gain sustainable recovery.

In fact most of the alternative programs recommended by the IMF's staunch critics are by and large along the lines of the policy measures outlined in the government's quarterly letter of intent to the IMF.

The IMF has streamlined its conditions and has increasingly emphasized the importance of national ownership (national political consensus) of policy reforms to provide the government with more freedom and a broader leeway in designing reform measures it considers socially and politically feasible. Most importantly, the government should improve its policy-making credibility and reform executing ability during the remaining eight months of the IMF facility in order to graduate from the program later this year as scheduled.

There is nothing so sacred about the People's Consultative Assembly decree of last August on the IMF program. It is simply a recommendation to the government not to renew its program with the IMF beyond 2003. The implementation of the recommendation certainly still depends on the prevailing condition.