Reform agenda set

An important element of the uncertainty responsible for the plunge in the rupiah's value in the past eight days was removed when the government finally signed on Wednesday the new letter of intent (LoI) that details the country's economic reform agenda for the next few months.

The signing of the agreement with the International Monetary Fund (IMF) will not only free up early next month the second disbursement of US$400 million from the $5 billion bailout fund for Indonesia, but also will reassure the market that economic reform is fully back on track again. The new agreement signaled to the market that the government has now regained the confidence of the IMF, which postponed its second loan from early April due to its disappointment with the implementation of reform measures in the first quarter.

The financial and capital markets are expected to stabilize soon, not because of the new loan to strengthen the central bank's reserves, but more due to the reassurance that the sorely needed reform measures will be realized.

Indeed the reform measures are precisely the policies that the government has to pursue, with or without support from the IMF, to strengthen the foundation of its economy. The restructuring programs are all designed to remove the woes that have been dogging the economy since the outbreak of the crisis in mid 1997.

The basic programs stipulated in the new agreement are not much different from the previous one signed on Jan. 20. Its thrust continues to focus on sound fiscal and monetary management, bank and corporate restructuring and good governance in the public and private sectors.

Programs in the fiscal and monetary sectors cover concerted efforts to improve budget discipline, through better accountability of extra-budget funding and off-budget funds and better tax administration, and to realign the intergovernmental fiscal balance to support the decentralization process.

Obviously, banking and corporate debt restructuring remains central in the reform policies because the nascent economic recovery will be sustainable only when the ailing banking industry -- the conduit of lifeblood to the economy -- becomes sound again. State and private bank recapitalization programs which could not be completed as scheduled in the first quarter will have to be wholly finished before the end of June.

However, sound banks alone are not fully effective to fuel robust economic growth if the corporate sector remains buried under mountains of more than Rp 300 trillion ($35.3 billion) in domestic debts and almost $70 billion in foreign debts. The new LoI stipulates stronger measures to accelerate the debt restructuring process. Further delays in the process might sabotage the budding economic recovery because most companies in the upstream and downstream sectors will remain closed to new financing facilities.

Both the government and IMF fully realize that the restructuring programs cannot by themselves guarantee that the economy will no longer be stifled by the excesses of corruption, collusion and nepotism, which were primarily responsible for the prolonged crisis.

The new document therefore also elaborates measures to audit greatly important government and state agencies and state companies as the Directorate General of Taxes, the Indonesian Bank Restructuring Agency, Bank Indonesia, toll road operator Jasa Marga, domestic telecommunications company Telkom and national flag carrier Garuda. A new governance framework will be set up for IBRA, which for at least the next five years to seven years will remain the most important economic organization in the country since it manages more than Rp 600 trillion in assets. The government is also required to follow up on the findings of previous independent audits on state oil and gas company Pertamina, the State Logistics Agency and state electricity company PLN.

Also as part of the promotion of good governance in the public sector, an independent commission will soon be established to audit state officials and good corporate governance standards will be applied to state and private companies.

It is imperative that the government meets the entire reform agenda set for completion before the end of June so that the next IMF review, scheduled for late July, will run smoothly. Another botched effort could once and for all destroy the credibility of the government and kill whatever little market confidence still remains in the future of the country's economy.