Mending ties with the IMF

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.