New vote of confidence

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.