Muddling through uncertainty

Muddling through uncertainty

The big question arising, now that the political uncertainty
has escalated to the probability of a change in government, is
how the economy will muddle through the transition period.

How the government of President Abdurrahman Wahid, further
demoralized by the second memorandum of censure from the House of
Representatives, will be able to manage the economy amid the
sharply eroded market confidence. How reform measures, badly
needed to maintain the budding economic recovery, can still
proceed under a government whose credibility and popularity are
now at their nadir.

Such issues would not be so worrisome in most other countries
where the head of government can change at any time without
causing serious damage to the economy. This is because most
governments are supported by a strong system of bureaucracy and
similarly well-established institutions in the other branches of
the government -- the judiciary and legislature.

But the current situation that is leading toward a seemingly
unavoidable change of government could be quite tumultuous in
Indonesia, where the institutions in all branches of the
government are still in the process of adjusting from an
authoritarian to democratic system.

What makes this process even more complex and potentially
explosive is the four year old economic crisis that is
threatening to lead the government into bankruptcy and leave the
whole economy in tatters.

This is the kind of situation that urgently calls upon the
President and the House, despite their differences, to
demonstrate strong spirit of statesmanship by continuing good
cooperation in leading the nation and country through the
uncertainty.

First of all, Abdurrahman needs to order his Cabinet, notably
the economic team, to continue their responsibilities as normal
and implement the reform agenda according to schedule, especially
the debt and corporate restructuring programs, which are pivotal
to sustaining the nascent recovery.

Vice President Megawati Soekarnoputri, who has been assigned
by the President to lead Cabinet meetings, is required to work
even harder to ensure that the economy can negotiate the
transition period without further damage being inflicted upon the
economic fundamentals. As the strongest candidate positioned to
take over from Abdurrahman, when his replacement finally becomes
unavoidable, Megawati should realize that the economy would make
or break her leadership.

Even though it is now virtually impossible to improve market
confidence amid the political uncertainty, policy consistency
during the transition period would help maintain whatever little
confidence remains and make it much easier to accelerate the
economic recovery once the political uncertainty is resolved.

The House's role is no less crucial in helping prevent the
economy from deteriorating, because many reform measures require
its approval.

The most urgent priorities now are quick deliberation of the
proposed amendments to the 2001 state budget and the central bank
law. Completion of these programs would pave the way for a new
agreement with the International Monetary Fund and expedite the
release of its third US$400 million loan tranche, suspended since
December.

A new accord with the IMF, which amounts to an
internationally-endorsed economic reform agenda, would kick-start
the process of regaining market confidence and the trust of
foreign creditors in the country.

Without market confidence the rupiah exchange rate against the
American dollar, already as low as its levels reached during the
peak of the economic crisis in 1998, will continue to weaken and
consequently inflate the state budget costs of fuel subsidies and
foreign debt servicing.

Further rupiah depreciation will also force the central bank
to continue raising interest rates in a bid to curb import
inflationary pressures. This, in turn, will increase the state
budget costs of domestic debt (bond) servicing, stifle economic
activities and heighten the risk of bad debts for banks. Just
look at how the composite price index of the Jakarta Stock
Exchange, a main barometer of the real sector, which had risen to
as high as 510 early last year, has now plunged again to less
than 360 points.

It is, therefore, most imperative that the President and the
House immediately put their enmity aside and start setting
deadlines for finalizing amendments to the budget and central
bank laws and consolidating a new reform agenda. We cannot afford
to waste any more time while the economy continues to bleed.