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.