Road to economic recovery full of potholes

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)