Mending relations with the IMF

A high-level mission of the International Monetary Fund (IMF) is expected here on Thursday to review Indonesia's reform programs in preparation for a new letter of intent (LoI) to guide the country's economic-crisis management.

The previous IMF review mission, which arrived in mid-April, returned to Washington empty-handed. However, the conditions now seem more favorable for the fund and the government to wrap up, within the next two weeks, a new reform package for recommendation to the IMF executive board in Washington. And if everything goes well, the board will endorse the package and release its third US$400 million loan tranche, of the $5 billion bailout fund, held up since December 2000. The process is expected to be completed some time in August, by which time a new government might have emerged from the special session of the People's Consultative Assembly.

There are at least three major factors that have contributed to such high optimism. The first factor is that most of the requirements imposed by the IMF for its extended facility program have, by and large, been fulfilled. The sales of Bank Central Asia and Bank Niaga are under way, the 2001 state budget has been revised, the fiscal authority of regional administrations has been realigned and the plan to issue dollar bonds secured with the natural gas sales revenue has been scrapped.

Most importantly, the government has compromised on its stance with regards to the planned amendment of the central bank law and seems to have agreed with the House of Representatives to extend deliberation on the law changes.

The second factor is the replacement last month of Rizal Ramli with Burhanuddin Abdullah as chief economics minister. This move is expected to improve the often-prickly IMF-government relations as unlike Rizal (now the finance minister), a staunch critic of the IMF who often took a confrontational and sometimes belligerent stance against the multilateral agency, Burhanuddin is more cooperative.

As a former deputy governor of Bank Indonesia and a senior economist who had a three-year stint at the IMF Headquarters in Washington in the early 1990s, Burhanuddin is fully aware of the IMF's role as an opinion leader for international creditors and investors.

He realizes that a good rapport with the fund means much more than access to its financial resources. Even more important is the international endorsement of Indonesia's economic reforms that will result from an agreement with the IMF.

The third factor is IMF managing director Horst Kohler's streamlining of the conditionality of the fund's financial resources. This will help expedite a new agreement with the fund. Realizing that borrowing governments have often been irritated and frustrated by what they see as excessive intrusion into their national decision-making authority by the IMF, Kohler now wants the IMF to focus its conditions on reforms critical to macroeconomic stability and be more cooperative, rather than dictatorial, with borrowers.

Indonesia's previous LoIs to the IMF, in which the government set out its overall policies, had been quite broad. For example, the latest LoI signed last September listed 67 points complete with matrixes and boxes depicting scheduled executions that went beyond macroeconomics.

Even though the elaborate conditions had partly been prompted by the capriciousness of the Indonesian government, which often backtracked on its commitments, such extensive conditionality is now seen as no longer conducive for maintaining good relations between the IMF and its borrowing members. Such detailed requirements do not provide governments with adequate leeway to adjust reforms to country-specific social, economic and political circumstances.

The government, however, should realize that even though the next agreement with the IMF would focus only on macroeconomic stability, the reform agenda that must be implemented to achieve a sustainable high growth would by no means be easier or fewer.

The reform programs ahead will instead remain greatly challenging. Without significant progress in structural reforms in the corporate, banking, public administration and judicial systems, the ailing economy will never be restored to sound, robust growth.