Road to economic recovery full of potholes

Government officials have made confusing statements on the reforms sponsored by the International Monetary Fund (IMF). Economist Sri Mulyani Indrawati, vice chairwoman of the University of Indonesia's Center for Economic and Social Studies, discusses the government's commitment to the measures.

Question: Do you think the government will again backtrack on the implementation of the IMF-sponsored economic reform?

Mulyani: I am afraid the issuance of confusing statements was due to economic ministers' poor sense of belonging and lack of comprehensive understanding of the reform measures, which are vast in coverage. The measures are actually so detailed, explicit and demanding that it is almost impossible for Indonesia to backtrack.

Q: Do you see any parties opposing the reform?

M: There are... they will surely try to make deviations in its implementation. The key problem is that relations between powerholders and business circles have been too close. Those who want to strictly enforce the reform measures will have to create adequate distance between the two. Transparency and fair competition in business activities cannot be established within just one or two months... However, reforms are a good initial action which, coupled with public pressures, will encourage government officials to stop using power to benefit their own business interests.

Q: Will intensification of student demonstrations affect the business environment?

M: They will, at least, be a pressure point for the government to become aware that signing an IMF reform agreement is not enough as society, represented by university students, is demanding establishment of a modern, consistent and transparent economic system in the country. Such an economic system, in line with IMF reform measures, is also awaited by foreign investors. Their return will depend on how the government manages the whole dynamics of the society and the momentum for economic recovery.

Q: Now that the government has been implementing the IMF reforms, do you see it winning public trust?

M: Cabinet members involved in last weekend's dialog meeting with students tried to show they were working hard to overcome the... crisis, but there is skepticism in society on whether the government has done its best... in line with what they want.

Such skepticism, caused by a bad image of the government, will undermine effectiveness of any policies it introduces. The government must therefore eradicate this image and try to manage society so it will behave in line with reform policies. If the government ignores this, the policies will not be effective.

Q: The government has apparently revised its budget for the second time, although it has yet to be announced...

M: Starting this fiscal year, the government is required to substantially change its budgetary policies because its budget will have extraordinarily heavy burdens ... it now has to bear costs of the issuance of government bonds, the restructuring of the banking industry, the solution of private corporation debt problems and social safety-net programs.

It actually has to explain this new policy, which is not explicitly mentioned in the IMF reform, to the public, who is participating in the state budget through its tax payments.

In future, the government will probably also have to revise its balanced budget policy due to changes in economic conditions.

Q: What about prospects for the rupiah's conversion rate?

M: I think a target of a conversion rate of Rp 6,000 per U.S. dollar will be reachable by the end of the 1998/1999 fiscal year next March on the condition that the IMF reform measures are implemented as scheduled. However, uncertainty may affect the conversion rate's development because implementation of the full reform measures cannot guarantee the achievement of the target.

Facts show implementation of economic reforms and the situation of dollar supply and demand contribute only about 70 percent to the exchange rate development ... (the rest) is determined by the subjective perceptions of market players.

The government must manage the situation so market players will behave positively toward implementation of the reforms.

Q: Depositors are worried about savings in commercial banks. Do you expect the banking industry will improve under the supervision of the Indonesian Bank Restructuring Agency (IBRA)?

M: It is difficult to expect the banking industry to recover its flawed intermediary function.

(Because of this) ...Bank Indonesia, the central bank, has decided to begin this week to offer its promissory notes, SBIs, directly to individual depositors in its effort to contract the money supply within a short period of time.

The IBRA will probably need two years to have commercial banks recover their intermediary function... it is also required to make management at individual commercial banks more transparent to the public because it has involved public funds, in the form of bonds, in their financial restructuring. (riz)