On the IMF-initiated debt rescheduling

On the IMF-initiated debt rescheduling

Arya B. Gaduh, Jakarta

For the most part, there was nothing out of the ordinary in
last week's presidential address. Ditto the section on the
economy -- that is, if we exclude the section's "prelude" on the
International Monetary Fund (IMF).

President Megawati Soekarnoputri began her report on the
economy with a commentary on the recovery effort and the role of
international institutions in them. She then alluded to the IMF's
"honest and open admission of past mistakes" before expressing
her hope for remedial actions by the IMF. The least the IMF could
do, she said, would be to initiate debt rescheduling initiatives
to ease the government's fiscal burden.

I find this part of the address puzzling. That the President
should begin with the IMF was natural a year after the end of the
program. What puzzles me is the latter part: Her hope for an IMF-
initiated sovereign debt rescheduling.

That was hope misplaced. The IMF is an international
institution with a limited mandate that includes surveillance,
technical assistance, and balance-of-payments support to
countries in crisis. The IMF cannot go beyond its mandate -- and
the President was asking the IMF to do just that.

The impression the IMF can initiate rescheduling might have
been the result of a misinterpretation of the Paris Club's
conditionality principle. With this principle, debtor countries
must participate in an IMF program, signaling a need for debt
relief, to qualify for special debt treatments. Or, in other
words, participation in an IMF program is "the key" to opening
negotiations regarding debt rescheduling with the Paris Club.

But the Paris Club neither lends nor gives this key to the
IMF: Only a debtor country's decision to participate in an IMF
program, and not the IMF, can open doors to negotiations. The
only way the IMF can be somewhat involved in this is if a debtor
country decides to be in the IMF program -- which is why, after
the speech, economist Dradjad Wibowo accused the Megawati
administration of wanting to invite the IMF back.

Personally, I don't believe this was the speech's intention.
That is why its mention of an IMF-initiated debt rescheduling was
odd. What is even puzzling is that, without a doubt, the
administration's economic team must have known about this, and
would not, with clear conscience, slipped it in the economic
report of the president's most important annual speech. Reading
the immediate responses of government officials in the media, it
seemed that even they were taken by surprise.

In the (slightly modified) words of Sherlock Holmes, when all
other contingencies fail, then whatever remains must be the
explanation. It this case, the explanation is Politics. My guess
is that, somehow, a member of the speechwriting team must have
thought taking an anti-IMF stance would boost the incumbent's
popularity in an election year.

If my guess is true, then it was a bad strategy. Most people
have forgotten about the IMF; meanwhile, the administration's
economic team is beginning to build their credibility as
competent managers of the economy. Though the economy is not
exactly on the up-and-up, maintained economic stability through
increasing US interest rates and high oil prices is something the
economic team can be proud of.

But instead, the spin-master decided to pick an issue whose
relevance is, at best, marginal. Worse still, this decision
projected an image not of a strong administration able to resist
foreign pressures and be independent (as was probably intended),
but of one whose economic team is unable to handle its own (debt)
problems without outside help. Then, there's the issue of its
logical implication: Is the Megawati administration really
inviting the IMF back?

This is unfortunate. In many ways, the economic team has,
gradually, gained credibility as able and independent managers
after the end of the IMF program. There was this image of the
coordinating minister for economic affairs, speaking at the
Consultative Group of Indonesia (CGI) meeting on December 2003,
arguing for a new approach that maximized Indonesian ownership of
the CGI processes.

For what it's worth, there is no point in reviving anti-IMF
sentiments. Yes, the IMF gave some bad recommendations -- but, as
the President herself admitted in the speech, the government was
equally responsible for accepting its recommendations. Let us end
this blame game; there are better ways to spend our energy,
political or otherwise, than playing this game.

The writer (abgaduh@csis.or.id) is an economist at the Centre
for Strategic and International Studies (CSIS). The views
expressed here are his alone, and not to be attributed to CSIS.