Mon, 22 Dec 2003

RI faces obstacles after IMF exit

The Jakarta Post, Jakarta

The International Monetary Fund has concluded its high-profile role in designing the country's economic reform program over six years with the announcement late last week of its last loan tranche.

Graduating from the IMF program leaves the country with enormous challenges ahead, notably due to pressure from nationalist and populist politicians, which could put at risk the sustainability of the government's economic reform agenda.

Even when the IMF program -- with its strict economic targets and tough measures -- was in force, the government had to sometimes bow to the pressure, with delays in reducing the costly fuel subsidy and slow progress in the privatization program as examples.

The risk of a slowdown in the reform drive will be even greater next year, particularly with the general and presidential elections, a protracted seven-month process. The continuity of the reform agenda is crucial to help revive investor confidence.

"Judging from the (election) participants, it's hard to say that there will be a single majority winner. And if that's the case, more compromises are likely to prevail," Pande Radja Silalahi of the Centre for Strategic and International Studies (CSIS) said.

The IMF approved on Friday the final US$505 million tranche for Indonesia, the final portion of a $5.3 billion lending program, which was an extension of a previous similar program requested by the government in the wake of the 1997-1998 regional financial crisis.

Without the presence of an IMF-sponsored reform program, the country would have no longer been eligible for the Paris Club debt rescheduling facility, posing a greater burden on the state budget.

Indonesia's relations with the IMF have not been smooth. Four governments had to deal with strong public opposition to the reform program prescribed by the fund. In fact, the country's former authoritarian leader Soeharto had to step down after 32 years in power after he raised fuel prices and closed down banks as recommended by the IMF.

The country is now set to enter the first year of a dialog program designed for those newly graduated from the IMF lending program, called the post-program monitoring (PPM).

The government has drawn up economic action targets in the white paper, to support its decision not to extend the IMF's special program. It covers three main goals; to retain and continue pursuing macroeconomic and fiscal consolidation; continue the finance sector reform drive; increase investment, export and employment opportunities -- all are drawn up into certain policies and targets to be met by until the end of next year.

Experts have said that all the targets will remain just that if the country fails to manage the elections in a democratic and peaceful manner.

While the elections will be closely watched to help measure investor confidence, of more importance, however, is the economic direction the next government will take.

"Whoever wins, what's important is how to consistently pursue the reform program -- with or without the IMF program. So, it is important for the government not to make too many compromises.

"Admittedly, that will be very difficult, but it should at least be at a minimum," Pande said.

Meanwhile, Chatib Basri of the Institute for Economics and Financial Research, School of Economics, University of Indonesia (LPEM-UI), highlighted the importance of strong leadership on the part of the next government.

"It's very important to have strong coordination within the government, which would send positive signals to investors," he said.

Equally important, Chatib added, was clear-cut, time-bound economic policies as well as a clear measure to gauge the government's discipline in meeting the targets.