Life after the IMF

Life after the IMF

The session on the future of the International Monetary Fund
program in Indonesia held on Monday by this newspaper as part of
its 20th anniversary seminar on Strategy for Indonesia's Economic
Development was really thought provoking.

The debate was made much livelier by the presence of
Narongchai Akrasanee, a prominent scholar and corporate leader
from Thailand, who delivered the keynote address at the opening
of the seminar.

As the minister of commerce when Thailand plunged into a
financial crisis in July 1997 that soon triggered similarly
devastating debacles in Indonesia, Malaysia and South Korea,
Narongchai was able to treat questions from the floor with
firsthand accounts: of the distressed and emotional mood within
the Thai government leadership when his country had to rush to
the IMF crisis center; and on how Thailand succeeded in
recovering from the crisis and left the IMF emergency hospital
after only 34 months of treatment.

Insofar as the experience with IMF crisis management is
concerned, Thailand is indeed a study of contrasts to Indonesia,
which remains in a fragile economic condition almost six years
after its emergency call to the IMF.

This is the bone of contention among staunch Indonesian
critics of the IMF's role who have been campaigning against an
extension of the country's IMF program, which is due to expire
later this year.

These critics, who are led by former chief economics minister
Rizal Ramli and Kwik Kian Gie, the state minister of national
development planning in President Megawati Soekarnoputri's
Cabinet, have political support from the People's Consultative
Assembly, the highest law-making body, which last year
recommended against renewing the IMF program.

Rizal, one of the four panelists at the seminar, presented a
well-constructed blueprint that points out the IMF's "sins",
which indicate that it is imperative that Indonesia does not
extend the IMF program and proposes alternative programs to
restore Indonesia to a high-growth path.

However, Rizal's points of argument seemed unable to convince
the audience of any benefits of not renewing the IMF program. On
the contrary, given the fragile macroeconomic stability, the
country could be in for a lot of troubles if the IMF program is
not renewed.

Terminating the IMF facility later this year could cause much
worse damage, especially in the run-up to the 2004 elections, as
the government will have to immediately pay all its debts (more
than US$8 billion) to the IMF and at the same time lose the
chance of obtaining debt rescheduling deals from the Paris Club
of sovereign creditors.

Rizal's contention that ending the IMF program would provide
Indonesia with greater flexibility and room to maneuver was
addressed by the IMF decision in 2001 to streamline its
conditions with emphasis on the importance of national ownership
(national political consensus) of policy reforms. The government
now has more freedom and broader leeway in designing reform
measures as it considers socially and politically feasible.

Yet most crucial is that terminating the IMF program would by
no means have any relevance to the basic requirements for the
implementation of the set of alternative programs the critics
have proposed.

The alternative solutions Rizal's team has proposed depend on:
effective national leadership, political stability, security,
secured rights to property and rule of law. But he failed to give
convincing answers to the question as to how ending the IMF
program would contribute to the creation of these basic
conditions. On the contrary, the required conditions are entirely
within the authority of the government to fulfill.

Indeed, as Narongchai also asserted from the experience of his
country, high discipline to implement reforms and effective
leadership are vital for a country to cope with an economic
crisis.

But it is these vital elements that are outstandingly lacking
in Indonesia.

Moreover, almost all the alternative programs, except for the
securitization of oil and gas receivables, which has out rightly
been rejected by all creditors, are by and large the reforms that
have been stipulated in the government's quarterly letter of
intent to the IMF.

Put another way, the IMF has never banned the government from
pursuing these measures. It is in fact the government that has
often postponed or backtracked on these programs due to social
and political reasons.

Hence, what would then be the relevance of ending the IMF
program with consistent implementation of the much-needed
reforms?

Many of the alternative programs also appear unfeasible as
they assume quick, dramatic increases in state revenues from
policy instruments such as tax efforts, which in almost all
countries are a long-term process.

Faisal Basri, another panelist at the seminar, rightly argued
that it is low institutional capacity and weak leadership, rather
than money, that are the main handicaps to the national drive for
reform. Or in the words of another panelist, Djisman
Simandjuntak, the root of the problems lie in the acute lack of
good governance.

There are thus only two options feasible for Indonesia. First,
extending the IMF program at least for another year to allow the
new government that will be elected in 2004 to decide on the new
status of its relationship with the IMF.

This alternative, as senior economist Mohamad Sadli said,
would not rock the boat (market and creditor confidence) at a
time when the country will face severe political turbulence in
2004.

Second, entering the IMF-post monitoring program, as Thailand
did in 2000. But this program requires the government to
immediately pay at least $6 billion of its debts to the IMF.

Whatever the choice will be, the market needs the reassurance
of IMF involvement in Indonesia, especially in the election year,
in view of the low credibility of the government's commitment to
reform.