Qualified confidence

We should not read too deeply into the remarks of optimism by International Monetary Fund Managing Director Michel Camdessus about the prospects of our economy. While the air of bullishness he fanned during his brief visit here could provide a psychological boon, we should instead focus our attention to the key factors he cited to qualify his rosy projections. The most important of them is the proper implementation of the reform measures already set for stabilizing the economy and eventually restoring it to the robust growth it had enjoyed until last year.

The first thing we should keep in mind is that all reform measures designed to cure a sick economy initially cause a lot of pain, especially now that we are facing unfavorable weather conditions from a prolonged dry season. Hence, we should prepare ourselves for worse conditions before things start to get better. The closure of 16 insolvent banks which will soon be followed by the foreclosure of the assets of these banks' debtors, business failures and massive layoffs is one of the series of pains we will feel.

We will feel the most hurtful pains next year when the government will have to cut subsidies to achieve a budget surplus of at least 1 percent of the gross domestic product -- one of the bitter medicines prescribed by the IMF. This means that the price of fertilizer, oil fuel subsidies, wheat flour and electricity will have to be raised. This in turn will inflict a double blow on most of us because while our purchasing power is being eroded by the sharp rupiah depreciation and slower economic growth we will have to suffer a higher inflation as well. Last month's 1.99 percent inflation, the highest monthly rise in the consumer price index since January 1996, was the start of the likely price gyrations we will experience within the next few months.

As market confidence will not likely return in full before April -- after the March election of a new president and vice president and the appointment of a new cabinet -- the rupiah rate will also remain volatile, though not as wildly as in last month. Consequently, the stock market will remain bearish and bank interest rates will be kept way above the normal levels prevailing last June.

The brunt of all this is that the unemployment rate will get higher due to the combination of massive layoffs caused by the structural adjustment and the very small number of new jobs being created during the current slow-growth period which may last at least until the first half of 1999. In the meantime, 2.5 million new job seekers will enter the labor market every year.

The other bleak outlook is related to our poverty profile. Even though the number of people living below the poverty line has impressively been reduced to about 16 million, there are tens of millions of others living on the brink of absolute poverty. The sharp decline in economic growth during the next two years will most likely push many of them down below the poverty line.

As the Pandora's box of the private sector's short-term foreign debts has yet to be opened -- the central bank is still taking stock of these debts and their maturity schedules -- we are possibly in for another jolt of rupiah volatility sometime within the next few weeks when the real debt profile is known.

Given the trial period ahead which may stretch the endurance and patience of those who must make the sacrifices, it now becomes more imperative than ever for the government to consistently carry out the reform measures.

We get the impression that the government has so far been willing to act quickly and consistently mostly on reform measures that do not require big sacrifices on the part of its own rank and file members and the political elite.

However, the implementation of the programs to develop good governance -- bureaucratic reform, the removal of crony capitalism and the transparency and accountability of the state budget -- has remained at a snail's pace. The government and others in the political elite seem not to have fully realized that good governance is a key component of the economic fundamentals and is crucial for restoring market confidence. Good governance also becomes more urgent during this trial period for maintaining the spirit of solidarity and optimism among those who will suffer most from the painful adjustments.