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.