New reform package

The government, after more than two months of delay, has finally drawn its new reform agenda for implementation under the International Monetary Fund's three-year extended facility to help the country cope with its economic crisis.

The reform package, as stipulated in its seventh letter of intent the government sent to the IMF executive board last week, constitutes the continuation of measures carried over from the previous reform agreement plus new items that are planned to be completed within the next few months.

The reform agenda still focuses on the core areas which greatly influence macroeconomic stability such as financial sector reform, privatization of state companies, asset recovery, fiscal decentralization, legal reform and public-sector governance. It also lists quantitative fiscal and monetary targets that have to be achieved until the next review period later in the first quarter of next year.

Some of the specific policy actions included in the new agenda are the divestment of state-owned Bank Tabungan Negara and Bank BNI, strategic sales of Indosat telecommunications company and Indofarma pharmaceutical firm, the resolution of big debtors and the sharing of losses of emergency liquidity credits between the government and the central bank.

Also prominent in the reform measures is the revision of the bill on an anti-corruption commission, which will be designed as an important instrument in the struggle against graft in light of building good governance.

The new reform agreement that is expected to be approved by the IMF executive board in December as a precondition to the disbursement of the next tranche of the IMF loan facility, conforms with the new IMF guidelines on conditionality.

The new guidelines, which were announced in September, emphasizes national ownership of sound economic and financial policies and adequate administrative capacity of a member country. The main principle of this directive is that the member country (in this case, Indonesia) has the primary responsibility for the selection, design and implementation of its reform measures. Its main objective is to demonstrate that Indonesia is sufficiently committed to implement the programs consistent with its administrative capacity and the political consensus it can gain.

The new reform agenda therefore is not as elaborate as the 53- point letter of intent signed last December because the new document focuses on the IMF's core areas of responsibility: Rectifying Indonesia's balance of payments problems without resorting to measures that could be destructive of its national prosperity, and to achieve medium-term external viability while enhancing sustainable economic growth.

Since a reform agreement with the IMF confers a kind of good housekeeping seal signaling its economic endorsement for Indonesian creditors, it will at least help support the government in its forthcoming negotiations with the international donor community (Consultative Group on Indonesia) later in January.

The next annual meeting with the CGI will be much more important as the government will have to ask for more soft credits in the form of program loans to finance its Rp 10.50 trillion (US$1.1 billion) pump-priming package. The additional fiscal stimulus is sorely needed to cope with the devastating impact of the Oct. 12 Bali bombings.

One cannot, however, pin too high of expectations on the new agreement with the IMF in so far as the bid to regain foreign investor confidence is concerned. A continuing program with the IMF only indicates Indonesia's commitment to execute much needed- reforms to deal with its economic woes.

Most important to investors, especially to the process of restoring market confidence is the actual implementation of the commitment. Unfortunately, Indonesia has lagged behind with regard to many of its reform commitments due in part to the complications it is facing in its transition from an authoritarian government to a democratic one and from a centralized administration to regional autonomy.

The core macroeconomic objectives of the reform agenda nonetheless remain achievable provided that the government, with full support of the House of Representatives, increases the momentum of its structural measures.