Mending ties with the IMF

High expectations of a new reform agreement with the International Monetary Fund next week will not likely be dashed as they were in April and mid-July. Judging from the smooth negotiations since early this week and the good rapport between the new economic team and the IMF review mission, one can say that a new letter of intent (LoI) is already in the bag. The final draft will most likely be ready for IMF management next week. The IMF executive board will approve the accord early next month, right before the Paris Club of sovereign creditors meets to decide on the effectiveness of a rescheduling deal for US$2.8 billion of Indonesia's official debts.

The market seems to be comfortable that an internationally endorsed reform program is in the pipeline, as evidenced by the sustained momentum of optimism about a more stable environment for the economic stabilization process.

True, market confidence, as reflected in the rupiah's appreciation, should be attributed primarily to the cascading impact of the end of former president Abdurrahman Wahid's erratic leadership and ineffective government late last month, President Megawati Soekarnoputri's selection of the right people for her Cabinet, strong support of her coalition government and the right scale of priorities she set for her Cabinet's working programs.

Put another way, the market's bullishness has so far been fueled mainly by the public's perception of the Megawati government's capability to lead the nation out of its present multidimensional crisis. Even good policies could fail if doubts about the quality of the public sector management undermine social support. Hence, expectations generated by perceptions of government capability are one of the keys to successful reforms.

A new agreement with the IMF will further strengthen market confidence as it will greatly help smooth Indonesian relations with its creditors in the Paris Club and the Consultative Group on Indonesia (CGI), scheduled to meet in October. One should not take lightly the good understanding shown on the part of foreign creditors, given the government's foreign debts of about $65 billion and corporate foreign debts of almost $70 billion.

A new reform accord with the IMF will therefore mean much more than access to the disbursement of the next $400 million tranche from the IMF extended facility. More importantly, restoration of an IMF-endorsed program, which was delayed in December, will determine the degree of Indonesia's country risk.

But then, however essential the ability to formulate good policies to be stipulated in the new accord and however important the market's perception of the government's capability, policies are only promises that have yet to be fulfilled.

In this context, the Megawati government is fortunate that it possessed right from the outset the most important ingredients to successful reforms: Strong support that will facilitate political feasibility of painful measures and perceived capability (credibility).

The reform programs to be stipulated in the new LoI to the IMF will not be less challenging but will instead be more daunting due to the damages left behind by the previous administration. The core measures will obviously remain centered on fiscal sustainability and structural reforms in the corporate, banking, public administration and judicial systems.

Therefore, the hardest part of the job is for the government to demonstrate its real implementation capability in delivering on the promises to be stated in the LoI.

Learning from the bitter experiences and mistakes of the previous government, the Megawati administration should develop the kind of capability that reflects three fundamentals in the strategic interactions between people and government officials: accountability, transparency and predictability.

Accountability means establishing criteria to measure the performance of officials as well as being an oversight mechanism to ensure that standards are met. Transparency requires clarity about rules, regulations and decisions in order to maintain political and procedural predictability. On top of all that, institutions must be designed to prevent politicians from using their authority to personalize both the material and political benefits that can be derived from their access to the rents created by state intervention in the economy.