Our last chance

Our last chance

Thorough implementation of a revised reform package agreed on yesterday between the government and the International Monetary Fund (IMF) after three weeks of negotiations could be the last chance for Indonesia to get out of its economic crisis. The other alternative would be a rapidly deteriorating situation which could result in chaos and the collapse of national stability.

In this context, we are encouraged to know that President Soeharto strongly instructed his cabinet yesterday to implement the revised program to the letter. Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita himself went into great lengths at a news conference yesterday to reassure the public that the cabinet would implement the package with determination. Such statements indicate a great sense of urgency and perceptiveness regarding the efforts needed to address the crisis.

Ginandjar, who led Indonesia's negotiating team in talks with the IMF since March 18, said the government was fully aware that it badly needed to regain market confidence to pull the nation out of crisis. He asserted that public confidence could be restored only if the government acted quickly, firmly and consistently to implement the IMF-brokered reforms. But given an appalling track record since November when Indonesia launched its first IMF-brokered reform package, which was revised Jan. 15 and revised again yesterday with a supplementary memorandum and seven attachments, the government needs to work extra hard to convince the domestic and international markets that it now really means business.

The new agreement requires Indonesia to implement a lot of measures before the IMF team recommends the new reform package to its executive board in Washington.

The government has wasted five months by backsliding on the reform package and by distracting itself and the market by strongly leaning toward the seemingly unsustainable quick fix solution of a currency board system, which would have pegged the rupiah to a fixed exchange rate with a foreign currency. The currency board idea was not even mentioned during the latest negotiations.

The government should not feel hurt or humiliated by the IMF measures to impose safeguards and a testing period before it disburses its second US$3 billion tranche of its bailout funds to Indonesia. After all, the IMF is not only obliged to account for its activities to its shareholders, including the economic power houses of the U.S. and Japan, it also has to guard its reputation as the international monetary system's global police force.

The new comprehensive package of measures, whose details are to be announced today, was built largely on the 50-point Memorandum of Economic and Financial Policies which was attached to a letter of intent signed by the President on Jan. 15. The supplement includes tough monetary policies to stem the rapid growth of the money supply in recent months, an orderly restructuring of the banking sector, corporate debt restructuring, a transitional fiscal policy that would enable certain subsidies to continue -- notably in food and energy -- and structural measures.

The negotiators agreed to add two new important elements to the program -- a solution to the corporate debt problem and concrete measures for a social safety net -- and established a clear-cut timetable for reform implementation and a comprehensive monitoring mechanism.

The social-safety net measures are designed to enable the government to cope with the short-term pains of adjustments, thereby reducing shocks that may affect reform implementation. The IMF agreed on a more gradual phasing out of subsidies for essential commodities to prevent social unrest. This will allow breathing space for the government to implement structural reforms to address deep-rooted economic ills. A solution to corporate debts through roll-overs to be negotiated next week should ease pressure on the rupiah.

One may wonder over the absence of any quick fix measures in the revised package regarding the rupiah's foreign exchange rate. There is no such quick fix because the reform's objective is to put the economy back on a strong, yet sustainable, path which would gradually restore market confidence in both the economy and the rupiah.

In fact, the announcement of the revised program itself has started the confidence-building process. It was reported yesterday that Japan would soon disburse $2 billion in aid to help guarantee trade financing for Indonesia. Earlier, Singapore Prime Minister Goh Chok Tong launched the first stage of a similar trade financing facility amounting to $3 billion.

Indonesia's trade has come to a virtual standstill because of the crisis, which has seen the rupiah's exchange rate plunge 70 percent since July. Unemployment has doubled to about nine million people and riots have taken place because of high food prices.

The reopening of trade credit lines will invigorate business and exports. The strengthening of the banking industry will contribute to the process of regaining confidence, perceived to be the main factor behind the rupiah's instability.

The government, admittedly, faces a greater challenge in implementing the reforms because the economic crisis has been full blown for several months, while a rising wave of student demonstrations is demanding political reform along with economic improvement.