RI economy worse than IMF hopes

RI economy worse than IMF hopes

The government has taken several measures in its efforts to
restore the economy, which has been affected by a monetary crisis
since July 1997. Economist Kwik Kian Gie reviews economic
developments during 1997.

JAKARTA (JP): Economic developments throughout 1997 have
been very much influenced by the government's agreements with the
International Monetary Fund (IMF) on the coordination of a US$43
billion bailout program for Indonesia's economic reform.

The program, which is also supported by additional emergency
aid of $6 billion, is very comprehensive and includes two
strategic sectors -- the restructuring of the banking industry
and state budgeting.

However, the program has failed to achieve some of its
targets. The program, which was revised on April 8, for example,
targeted a negative economic growth of 4 percent in 1997 but the
gross domestic product (GDP) is most likely to contract by 15
percent. This year's inflation rate is likely to reach 80
percent, far higher than the 17 percent targeted by the IMF.

The state budget for 1998/1999, which was originally aimed at
producing a surplus equivalent to 1 percent of the country's GDP,
was revised downwards so that it was projected to suffer a
deficit of 3.2 percent. Yet, in reality, the budget deficit might
fall in the range between 6 percent and 8 percent.

The Fund estimated that the oil price level, which will be
used for the calculation of the state budget, would average
$14.50 per barrel but oil prices are now declining to about $10 a
barrel.

Such misprojections have raised the question of whether $43
billion would still be adequate to help rehabilitate the
devastated Indonesian economy. Economic observers find it
difficult to obtain the answer for such a question because the
government has never explained the details of the use of the
Fund's aid.

According to reports, almost all the points of the agreements
with the Fund have been accomplished by the government as
scheduled and the disbursement of the aid, therefore, has thus
far been smooth.

To meet the agreements, for example, the government has
maintained its tight money policy to prop up the rupiah's value
and to control inflation, even though the policy has come at a
very high price with the bankruptcy of many companies and the
increase of bad loans in the banks. The 12-month emergency aid of
$6 billion from the IMF has also been channeled to poor groups of
people even though hunger and failures in schooling are getting
more serious. The government has also shown its best efforts in
the privatization of state-owned companies even though these
efforts are not effective due to investors' low level of interest
in buying their shares. Structural reform, which is aimed at
eliminating monopolies and other market distortions -- including
the government's blind act of subsidy abolition for fertilizers,
-- has also been implemented. On the restructuring of corporate
debts, the government has also initiated the establishment of the
Indonesian Debt Restructuring Agency (Indra), even though its
service is not so attractive due to domestic debtors' reluctance
to negotiate debt solutions.

For the restructuring of the banking industry, the government
has encouraged commercial banks to increase their capital
adequacy ratio (CAR) -- the ratio of equity against risk-weighted
assets.

Banks whose management is now being taken over by Bank
Indonesia, the central bank, will need total funds equivalent to
about 15 percent of the GDP of about Rp 400 trillion (US$51.2
billion), if they want to increase their CARs to 8 percent and to
repay the liquidity support that they have received from the
central bank.

All Indonesian banks will need a total of Rp 300 trillion --
equivalent to about two thirds of the GDP -- if they want to
operate healthily. Their healthy operation is badly needed if
Indonesia wants to restore its economy.

However, the government itself looks confused, so that it
introduces a plan on the recapitalization of banks, instead of
their restructuring. The government has never explained whether
this recapitalization of the banks is aimed at increasing their
CARs or just covering up their nonperforming loans.

What is more difficult to understand is the government's plan
to finance the recapitalization with public money, which will be
generated through the issuance of bonds. The government will
inject the bond funds into the banks and regard them as its
equity participation in the banks.

This program is unlikely to succeed and the current government
might be unable to solve the banking problems because it will
only be in office for about one year. The new government
resulting from next year's general election, therefore, will have
to overcome these problems. The next president should realize
that his tasks will be very hard and he will never be able to
accomplish them without total support from the people.