New intent to reform

New intent to reform

The fewer programs of action stipulated in the new Letter of
Intent (LoI) signed by the Indonesian government and the
International Monetary Fund (IMF) on Monday do not by any means
indicate fewer daunting reforms ahead. Nor does it reflect a more
relaxed stance on the part of the IMF with regard to the
disbursement of its extended facility.

The 35-point new reform agreement, which replaces the 67-point
LoI signed last September, is less elaborate simply because of
the new policy taken by IMF Managing Director Horst Kohler to
streamline the conditions on its financial resources. The IMF now
focuses its conditions on reforms critical to macroeconomic
stability and prefers to be more cooperative, rather than
dictatorial, with borrowers.

In fact, the challenges ahead are even more formidable as the
present government has to speed up reform measures to redress the
damages caused by the delay of the many painful programs under
the previous administration of Abdurrahman Wahid.

The many measures that should have been implemented during the
first half of the IMF three-year, US$5 billion extended facility,
which was launched in January 2000, have to be carried over to
the remaining 16 months of the bailout program.

No wonder, therefore, that the core reforms mentioned in the
new LoI still boil down largely to economic crisis management to
stop the economic bleeding.

The focus remains on macroeconomic stability through fiscal
consolidation, a fairly stable exchange rate and fairly low
inflation. All this requires a quicker pace of asset recovery,
corporate debt and bank restructuring and privatization of state
companies.

These measures aim at raising revenue to keep the state budget
deficit at a sustainable level (below 4 percent of the gross
domestic product). What makes fiscal management more challenging
is that it comes at a time when the government's foreign debt
servicing burdens will increase as more debt principals mature.
New foreign loans will decline sharply. The World Bank, which
accounts for almost 25 percent of the official annual capital
inflow, has slashed its yearly loan commitment to $420 million
from an average $1.2 billion previously.

The $400 million, which will be disbursed by the IMF in the
third tranche of its $5 billion fund within the next few weeks,
cannot be used for the budget as it is designed only as a second
line of defense within the country's foreign reserves.

Without additional debt-rescheduling packages from the Paris
Club of sovereign creditors, the government's capital account
will certainly suffer an increasingly bigger amount of net
resource outflow, meaning debt servicing and principal payments
will be much larger than new loan disbursements.

Set against this severe liquidity crisis, private investment
should be the prime source of fuel to drive the economy. The
problem, though, is that private investors will remain on the
sidelines, unless macroeconomic stability is restored and the
degree of uncertainty in the business climate is minimized to the
point that enables businesses to make reasonable risk
calculations.

Sure, political uncertainty has been resolved with the fall of
Abdurrahman's erratic leadership and the rise of President
Megawati Soekarnoputri with strong support from her coalition
government. However, overwhelming problems remain in law
enforcement, the implementation of regional autonomy and the
security situation in several provinces.

The imbroglios suffered by several major foreign investors
from countries that have so far been the main sources of private
capital for Indonesia, have further dampened investor interest.

Mining and agribusiness, including fisheries, which were
supposed to be the most promising businesses for new investors,
are unfortunately caught up in a legal limbo within the
transition from a centralized government to regional autonomy.

It is therefore no exaggeration to say that a successful
execution of this reform agreement could be the last chance for
the government to revive investor confidence in the economy. More
backtracking would make Indonesia a basket case in the eyes of
both creditors and investors.