Wed, 30 Apr 2003

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.