RI, IMF need to find compromise

RI, IMF need to find compromise

Indonesia has branded the International Monetary Fund (IMF)
reforms unconstitutional after the Fund announced a delay in the
next installment of loans. University of Indonesia economist Sri
Mulyani Indrawati , discusses possible impacts of the rift.

Question: On Sunday, President Soeharto said that parts of the
IMF reform package were not in line with Article 33 of the
Constitution, which stipulates that Indonesia's economy should be
based on family principles. Why did he make this statement two
months after he himself signed a letter of intent confirming an
intention to carry out the reforms?

Mulyani: I don't know what the President meant, but recent
statements by government officials have suggested that they are
concerned that the reform measures, which are intended to help
lift the country out of crisis, have demanded too much at too
great a social cost. They are therefore looking for a bargaining
position from which to renegotiate terms with the IMF.

I'm sure that the IMF will be willing to make adjustments to
the reforms if negotiations proceed constructively and requests
are backed up by data showing that the reforms have placed heavy
burdens on society.

However, from the statements, I myself found it difficult to
distinguish whether the intention was to protect the whole of
Indonesian society, or merely certain vested-interest groups.
Reforms implemented since agreement was reached with the IMF on
Jan. 15 have indicated that the government has been influenced
more strongly by vested-interest groups than by society at large,
as measures pertaining to clove trading and the automotive
business have shown.

Q: Which parts of the 50-point reform package do you think are
not in line with the 1945 Constitution?

M: Some of the points relating to structural adjustment,
particularly those which require removal of barriers to foreign
investment. The same applies to commitments to abolish market
distorting policies such as the National Logistic Agency (Bulog)
monopoly on basic foodstuffs.

The government has viewed these measures as an attempt to
introduce liberal market mechanisms into the Indonesian economy,
but in fact Indonesia's economy is in some respects less
regulated than that of the United States. For example, in
Indonesia a company can control a market share of up to 90
percent and a business group can operate upstream and downstream
manufacturing activities without any government restrictions.

In comparison, Microsoft has difficulty introducing new
software if it has the potential to gain control of a majority
share in the highly regulated United States market.

Q: An IMF delegation is expected in Jakarta this weekend. Do you
think a compromise will be reached?

M: A compromise is essential. Indonesia's economy cannot afford
uncertainty for much longer. Indonesian negotiators must be given
full authority to make decisions for the interests of Indonesian
society, and not just for certain vested-interest groups. I am
sure that the IMF will be flexible and consent to adjustment in
investment, trade and privatization reforms if the Indonesian
negotiators back up their request with data on the social impact
of the transition. But the IMF will never yield on reforms to
correct government policies responsible for market distortions
and discrimination.

If the negotiators press to preserve market distorting
practices, unfair policies and the interests of politically
influential businessmen, it will be a folly. It will be obvious
that they are not representing the interests of the entire
Indonesian nation.

Q: What will happen if the IMF decides to delay disbursement of
the second tranche of aid for Indonesia?

M: I fear that all other multilateral and bilateral funds will
also be closed to Indonesia because the agreement entered into
with the IMF symbolizes the internationally agreed rules of the
game. If the IMF withholds the aid it will confirm that Indonesia
is unwilling to meet the expectations of the international
community.

Furthermore, foreign private investors will also shun
Indonesia. If the IMF, a large international institution, cannot
succeed in securing government cooperation, what hope do
individual investors have.

Q: There is some pressure on Indonesia to adopt a currency board
system to stabilize exchange rates. Can it be done without IMF
support?

M: Indonesia will never be able to adopt a currency board without
IMF support. Moreover, Indonesia's economic and market structures
could not support such a system. Confidence in the rupiah will
not be restored merely by introducing legislation on currency
convertibility, it also requires prudent management of the
economy.

A feasible alternative is to reintroduce a floating exchange
rate system with a set intervention band. This could succeed with
support from the IMF, the Group of Seven (G-7) industrial nations
and certain foreign central banks.

Q: What are the prospects for the Indonesian economy this year?

M: Bleak. This year's gross domestic product (GDP) is likely to
show negative growth, inflation may exceed 50 percent and
unemployment will increase. (riz)