Mending relations with the IMF

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.