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.