Letters of Intent frustrate Soeharto to Megawati
Letters of Intent frustrate Soeharto to Megawati
M. Sadli, Emeritus Professor of Economics, University of Indonesia,
Jakarta
Part 2 of 2
In the end, it was Megawati Soekarnoputri as vice president,
who in May, 2001, took an initiative to invite back the
International Monetary Fund.
The IMF replied that it was ready to do so on three
conditions: First, there should be a review of the government
budget for the year 2001; second, the efforts of the government
to change Bank Indonesia's Governor, Syahril Sabirin, should be
reconsidered in respect to the Law upholding the independence of
the central bank; and third, the idea of assets backed
securitization should be discarded. Then vice president Megawati
succeeded with the cooperation of the legislature, and Anoop
Singh of the IMF came in June 2001.
On Aug. 27 this year a new Letter of Intent was signed. The
environment was more friendly this time because Megawati was
President and the new economic team was much more IMF-friendly.
The IMF also discarded the old "micro-management" approach
whereby many items covering a lot of areas were made specific
targets with deadlines for execution, in matrix-like time table.
The IMF shifted more to "macro (economic) management".
The current IMF program will end in 2002. But the government
needs further bilateral debt rescheduling after 2002 through the
Paris Club. That requires the country having an IMF program, a
current Letter of Intent (LoI) and good relations with the IMF.
Hence it is pretty sure that there will be an extension of the
IMF program for another three years.
Will the end of such dependence on the IMF occur in the medium
term? South Korea and Thailand have graduated out of that. The
prospect for Indonesia is still uncertain. Thirty years ago it
took from 1967 to 1974, i.e., seven years, to cut this umbilical
cord.
Again, upon recommendation of the IMF, the budget deficit is
being contracted. From some 5 percent of gross domestic product
in 2000, this tolerable deficit is put at 3.7 percent of GDP for
2001 and should go down to 2.5-2.7 percent in 2002. Of this
shortfall only one-third could come from net foreign aid.
Gross foreign aid is much bigger but the largest part will go
back for repayment of principals. Hence a long round of debt
rescheduling is required to lessen the burden of total external
debt equal to GDP and more than twice of exports of goods.
In 1969 the country received 30 years of debt rescheduling
without amortization costs through the intermediation of Dr.
Hermann Abs, a German banker. On top of that, the Paris Club gave
seven years grace, the amounts to be added to the last seven
years of repayment.
Today the country desperately needs a similar break. The role
of the IMF may be important for finding such a resolution, but
debts to the multilateral institutions are far more difficult to
reschedule or to be accorded forgiveness. For the time being,
this major foreign debt overhang is weighing as a heavy albatross
around Indonesia's neck.
From a fiscal standpoint there is ample room for improvement
of the government budget, but this requires painful measures and
a good doses of political will. If and when the large subsidies
for domestic fuels and electricity rates can be phased out, the
savings can be some 5 percent of GDP.
The prices of kerosene and diesel oil are only a fraction of
those in Singapore with the result of extensive smuggling.
Domestic tax revenues are also some 4 percent of GDP below what
is current in neighboring countries.
Hopefully the high savings rate prevailing in South and East
Asian countries can return in Indonesia. That will solve part of
the problem, but not quite for the balance of payments gap. That
will require return of normal flows of external capital, which is
not forthcoming as yet.
At the present time the IMF, World Bank and Asian Development
Bank, have still a lot of complaints about unresolved problems
with respect to the restructuring of the Indonesian economy.
The old complaint is that so many reforms, committed in LoIs
since 1999, are still tepid in execution, such as banking
restructuring, privatization of state enterprises, sale of IBRA
held assets, overhaul of the judiciary system, and stemming
corruption.
Disbursement of Asian Development Bank and Japanese co-
financing is being stalled because he passing of new laws to meet
conditionalities, like for money laundering and the basic law on
the state electricity board, are proceeding very slowly in
parliament.
The numerous conditionalities imposed by the multilateral
institutions are not quite in line with the political mood and
will of the country embroiled in a messy political process
towards greater democracy.
That begs the question as to whether the IMF, the World Bank,
etc., are severely overasking, or whether such external pressures
are constantly needed, but do not expect smooth and expedient
accommodation.
All of the required reforms are badly needed, but more time is
required for implementation. In the end the IMF has shown
flexibility and more patience, but that differs from time to time
according to the quality of the government counterpart. With
Megawati Soekarnoputri the international goodwill and patience is
certainly greater than with B.J. Habibie and Abdurrahman Wahid.
Lastly, with the Bank Indonesia there is also something of a
running battle about monetary policies. The IMF regards the
management of the volume of base money (amount of money in
circulation attributable to the central bank) too lax, resulting
in a higher inflation (10 percent per annum and up) than is good
for economic recovery.
Bank Indonesia's defense is that it has to accommodate the
increase of demand for liquidity as a result of severe
depreciation of the rupiah and the consequent rise in import
prices and others related. It is kind of a chicken-and-egg
phenomenon.
The above was the writer's presentation at the one-day Joint
Public Forum on Indonesia. It was held in Singapore on Nov. 1 by
Singapore's Institute of Southeast Asian Studies and Jakarta's
Centre for Strategic and International Studies.