New vote of confidence
The International Monetary Fund (IMF) decided on Monday to resume its program in Indonesia, which was put on hold last December due to the government's failure to implement the reform measures promised in September 2000. The move will soon release the third tranche (about US$400 million) of the IMF's $5 billion extended facility to strengthen the country's international reserve.
But more important than the replenishment of the foreign exchange reserve, the decision by the IMF executive board in Washington will help maintain international confidence in the government's economic management and secure several major expenditure and revenue items in the current state budget. Because the IMF endorsement of the reform program automatically validates the rescheduling of $2.8 billion in debt principals maturing between last January and March, 2002, based on an agreement signed with the Paris Club of sovereign creditors in April, 2000.
But instead of rejoicing over the international support, the government is required to work harder to realize the reforms it pledged in its new agreement with the IMF last month. This is the only way for the government to sustain economic recovery and maintain international support.
Brought down to its knees by the mountains of debt, the government will have to again knock on the doors of the Paris Club, asking for another deferment of debt payments due after March 2002 to provide breathing room in external liquidity and to give it crucial space in strengthening the economic recovery.
In fact, the government has assumed a new debt rescheduling agreement with the Paris Club in addition to the first deal for $4.7 billion in September 1998 and the second one for $5.8 billion in April 2000. The draft 2002 budget assumes that at least $2.5 billion in debt principals due next year will be rescheduled.
Even with new debt rescheduling, foreign debt service and installments next fiscal year will still amount to more than $8.1 billion. That shows how huge the public sector's foreign liabilities have been (last estimated at $70 billion).
Hopefully, negotiations for the next package of debt rescheduling, to be called at Paris Club III, will run smoothly so that the new deal will at least cover the debt principals maturing between April, 2002 and Deecember, 2003, when the IMF extended facility will also expire.
Theoretically, debt rescheduling is only a temporary relief in coping with short-term cash flow problems and it has only a marginal impact on the net available cash. What Indonesia really needs is a boost in real liquidity that stems from debt reduction because the debt burdens they will continue to hold the public sector in a cash-strapped condition for the next five years.
However its debt burdens are measured, Indonesia actually should qualify for the category of a severely indebted poor country, which would entitle it to partial debt relief. But asking now for debt forgiveness, besides requiring arduous negotiations and much more stringent conditions, could immediately give the wrong signals to the international market even before any deals are worked out. The case would, however, be different if the initiative came from the IMF or the World Bank.
The challenge now is how the government can build up a conducive international public opinion setting to support a campaign for such a relief.
But for sure, the manners in which the government is now conducting its drive against corruption and gross inefficiency are inimical to any efforts to attract international support and sympathy. Many leaders in the government and legislature continue to behave and act as if there is no crisis at all. Businesspeople believed to be partly responsible for the economic crisis and for the mountains of debt that now almost bury the whole nation remain free to dine and entertain at plush hotels, drive their luxury limousines or enjoy life overseas.
Only by going the extra mile to complete all the reforms, however painful they may be, and by behaving and acting in full reflection of austerity can the government maintain market confidence and international support for its economic crisis management.