Mon, 17 Jun 2002

New reform agenda

The government's new economic-reform agreement with the International Monetary Fund will hopefully end the unnecessary public debates on whether Indonesia should exit or remain under the extended fund facility of the multilateral agency.

With all due respect to State Minister for National Development Planning Kwik Kian Gie, highly regarded for his impeccable integrity, we nonetheless find it mind-boggling to fathom why Kwik broke ranks with the Cabinet and instigated public debate on such non-issues as that of the IMF role in Indonesia.

We loved and fully supported Kwik when he renegaded and acted as an iconoclast of such problems as the government's alleged preferential treatment of large corporate debtors and the handling of numerous other corruption cases. However, bickering in public over a policy decision that has been adopted by the Cabinet could give the wrong signal to the market and supply new ammunition to those, who are opposed to the reform campaign, to discredit the government and stir up political instability.

As a member of the Cabinet, Kwik should have realized how devastating would be the impact on market confidence in the country, if the government, notorious for its weak leadership, creaky and corrupt bureaucracy and judicial system, abruptly ended its reform accord with the IMF.

Kwik, who himself has had experiences in negotiating reform agreements with the IMF in his capacity as the chief economic minister in 1999-2000, should know that IMF approval of the reform program confers a kind of good housekeeping seal signaling its economic endorsement for Indonesian creditors, private investors and the World Bank to continue dealing with the country.

The IMF, despite its grave errors in the past, remains an opinion leader for the international market regarding Indonesia because IMF credibility and competence are still held in much higher regard than that of the government that is perceived to be one of the most corrupt in the world and which has often backtracked on its reform commitments.

Without an independent, international overseer of the government reform programs, as the one now outlined by the IMF, very few foreign creditors would deal with Indonesia since its public sector's debts alone are already as large as the country's gross domestic product.

As a seasoned economist it would be foolhardy for Kwik to assert that the IMF loan did not help the government much because its fund could not be used for budget expenditures. He should know that IMF loans serve only to strengthen the government's foreign reserves and are held by the central bank as a second- line of defense for the rupiah in light of securing market confidence in the external balance position.

Lambasting the IMF for what he called its coercion of the government to hastily sell nationalized banks to private investors while they still hold huge sums of government bonds does not make any sense at all.

Kwik himself has often criticized Indonesia for being very much like a communist country because most of the country's economic assets are now under government control.

He is intelligent enough to realize that the longer the banks remain under government ownership the longer would be their recovery. Only new strategic investors will be able to accelerate their restructuring.

Obviously, the nationalized banks should be sold together with the government bonds because without these bonds being booked as their capital these banks should have been liquidated years ago.

Kwik, in complaining that foreign investors have not returned to Indonesia despite the reform agreement with the IMF, has totally missed the point.

What foreign investors in their right mind would come to Indonesia when its legal framework is still so creaky and corrupt, its financial system fragile, when regional autonomy is causing so many complications and uncertainty and many narrow- minded, self-serving politicians are stoking xenophobia in a bid to gain popularity.

We don't see anything wrong with the measures stipulated in the reform agreement with the IMF. Last week's accord that constitutes the second supplement to the 53-point agreement (Letter of Intent) with the IMF that was signed last December still focuses on the core areas that greatly influence macroeconomic stability: Financial sector reform, privatization of state companies, asset recovery, fiscal decentralization, legal reform and public-sector governance.

All these programs are completely sensible because without significant progress in bank restructuring, the sale of state companies and the distressed assets currently managed by the Indonesian Bank Restructuring Agency, legal and governance reform as well as law enforcement, the macroeconomic condition will remain fragile and the recovery process will never gain a strong footing.

These reform measures should be implemented, with or without the IMF fund facility, otherwise the economy will never achieve sustainable recovery.