Miscommunication affects Indonesia-IMF ties

There has been some friction in the relationship between the government and the International Monetary Fund (IMF) over the methods to improve Indonesia's economic situation. Economist Kwik Kian Gie discusses the possible cost.

JAKARTA (JP): Relations between Indonesia and the IMF have become strained for an unclear reason. Instead of speculating about the reasons for the tension, we had better discuss the next step that Indonesia should take.

Confusing as the situation may be, IMF first managing director Stanley Fischer said last week that the fund was open to flexibility in its economic program for Indonesia.

Such a statement is wise considering that economics, like other social sciences, is not a precise science. We cannot guarantee an absolute restoration in investor confidence, a subsequent inflow of foreign capital and a more robust rupiah if the government firmly implements the IMF 50-point reform program within a certain period of time.

The government and IMF officials working here, therefore, should continuously monitor the reform implementation and make necessary adjustments. Just like in company management, such continuous adjustments are very important.

The fact is, the rupiah has yet to strengthen to 5,000 against the dollar, a level regarded as justifiable by various parties. Meanwhile, it is clear that if the rupiah continues fluctuating at its current level of between 10,000 and 12,000 to the dollar, about 80 percent to 90 percent of Indonesia's factories will be forced to close down.

President Soeharto, therefore, was right when he said that strengthening the rupiah's value was an undebatable must. We must have a serious discussion with the IMF, asking for its support to stabilize the rupiah's value as soon as possible.

If the IMF does not agree to support us in this way, we could abandon our agreement with it. The most important unsolved factor is how to obtain an adequate level of foreign exchange reserves to support our rupiah strengthening measures. Looking for an adequate amount of foreign loans would be very difficult, but not impossible if the newly established cabinet is regarded as credible by the international community.

To stabilize the rupiah, Indonesia does not necessarily have to adopt a currency board system (CBS), unless the system is different from what has been generally understood. Simple calculation shows that the generally understood CBS would be absurd for Indonesia and its adoption would cause the economy to collapse.

It is, therefore, very surprising that people continue calling it a currency board when what they are really talking about is a measure to stabilize the rupiah's exchange rate. Such confusion in terminology is one of Indonesia's weaknesses in its relations with the international community.

Suppose the rupiah's value against the dollar strengthened and stabilized at a proper level. Would the economy automatically recover? Absolutely not.

The rupiah's stabilization is needed particularly to help prevent the closure of too many factories in the near future. We would then have to compete against time to eliminate economic distortions. Otherwise, a more serious crisis could take shape in two or three years because our foreign debts would increase, thereby expanding our savings investment gap, which would in turn put heavy pressure on our current account deficit.

A sector seriously damaged by the crisis is the banking system. Many borrowers have failed to repay their debt principles and interest because their businesses are stagnant and face liquidity problems. Meanwhile, depositors continue withdrawing their savings from domestic private banks.

Even though many banks are in the red, they have not faltered because they receive liquidity assistance from Bank Indonesia. The National Banking Rehabilitation Board, however, is to select which banks can be salvaged and which will have to be liquidated.

The IMF and the international community are correct in their conclusion that the banking sector should receive a high priority in the country's economic rehabilitation. It is necessary for Indonesia to invite them to support a special measure to help strengthen and stabilize the rupiah.

Such a measure would become a plus to the IMF reform program. President Soeharto was right when he introduced the term "IMF- Plus" in his speech before the People's Consultative Assembly on March 1. But confusion followed when he used the terminology of the CBS in referring to a measure aimed at strengthening the rupiah. The IMF and the international community, therefore, reacted negatively because they got a wrong perception.

We know that communication between the government and the IMF has not been working as it should. But it would be unbelievable if such a misunderstanding became serious since the IMF has a permanent staff in Jakarta.

So continuous communication and adjustments are absolutely a must. The use of exact terms, particularly those which have been universally understood, is important for better communication.

The international community, for example, is confused if we talk about a family system in our economy.