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)