Rupiah could worsen with further IMF delay

Opinions have been brewing for quite some time over the "medication" of the country's crisis. The following is an excerpt from a recent interview with economist Mari Pangestu.

Question: How do you see the latest tension between Indonesia and the International Monetary Fund (IMF)?

Answer: Good ties with the IMF are still evidence for foreign investors in relation to confidence recovery for Indonesia. The world will use the IMF's evaluation on Indonesia because the international community cannot follow development here on a daily basis. Creditors or investors will watch carefully whether Indonesia is able to implement the necessary policies to restructure its economy. The rescheduling of the Paris Club on Indonesia's debt is associated with the relationship between Indonesia and the IMF.

Q: Is that fair on Indonesia?

A: Well ... actually, foreign investors make their own decisions. Investors usually have their own projections and evaluations, whether they want to invest or wait. The IMF's evaluation is only one of the (available) projections.

As for creditors, they could restructure loans, or take different attitudes (toward Indonesia as a debtor), depending on any possible changes.

I don't think this is a question of whether it is fair, but more about evaluations of whether the country can conduct policies. The issue is about Indonesia ... while the IMF is only an evaluator.

Q: How would you evaluate the IMF's assistance for Indonesia?

A: It's been an up and down situation. The IMF has been criticized as being too tough in the beginning, but it later became "softer", though it delayed the disbursement of funds.

Now it is becoming tough as it has been regarded as too soft. I think there is a relationship here with the change of the government in the United States.

At the beginning of our so-called democracy we were given more chances ...

Q: Has the IMF been too demanding lately toward Indonesia?

A: I don't think so. What the IMF wants from Indonesia is found in the Letter of Intent, except those related with issues of the Central Bank which came up later. But actually, it is our own mistake that such an issue (the amendment of the central bank law) was raised. .... If the government think it cannot meet the target, which was set together with the IMF, there should be alternatives...

Q: But the IMF seems to be too tough on the amendment of the central bank law.

A: The original item on this issue only stipulates that Indonesia wants to have an independent central bank. The basic concern is now whether the amendment will affect the independence of the central bank. So the IMF has the right to make such a request because there will likely be significant consequences (of the amendment) ...

Q: Is Indonesia becoming really ill-behaved with regard to its commitment to what has been agreed with the IMF?

A: No. There are other countries which are (worse). Remember once the IMF pulled out from Russia and Peru. The IMF is still giving Indonesia a chance, and I think Indonesia is too important for the IMF to ever pull out. We haven't been so bad.

Q: Do you think the government is too stubborn?

A: This is the reflection of country's whole situation. There is still no strong leadership in general and also in economic issues. There are no clear directions showing us where we want to go and what the priorities are for recovery programs. I think the IMF is willing to be flexible if we show a firm attitude. So we have to be able to give clear directions.

Everyone including investors are waiting for clear directions; they know that the recovery is going to be long, but until now we're just stuck...

Q: What should be done?

A: The leadership, including policymakers and the House of Representatives should reach a consensus. As a policymaker, one must be able to convince the House and get its approval. They both have to make the process work.

Q: Do you see further possibility of the IMF delaying the loan disbursements given our present condition?

A: Yes. When this really happens, the rupiah will be worse. A lot of things are very dependent on the rupiah; we would have to revise the budget, restructure debt restructuring. In addition, there would be slower economic growth which would then affect everything else.

Q: How would you say the political situation contributes to this condition?

A: We know that the political process will remain very fluid. I repeatedly say the related parties must at least agree among themselves to set an economic priority. Most people are not very optimistic that they can come to that kind of consensus.

But at least they can come to a consensus in bank restructuring, or prioritizing poverty and employment.

Whether you are optimistic or pessimistic, whether something like that can happen is another question. We have been talking about consensus, at least for economic priority, since a long time ago but there's no realization.

We need to see the IMF as a leading package, a program consisting of many parties, including the World Bank, bilateral and multilateral donors. The program is not designed by the IMF itself but also other parties, directly and indirectly. When the IMF pulls out, other donors will follow.

Q: Does the IMF really have an effective "prescription" which will benefit Indonesia in the long run?

A: Gradually, yes, including the recovery program which covers corporate-debt restructuring, bank restructuring and microeconomic stabilization. There are also programs related to poverty, the social safety net and unemployment as well as legal and institutional improvement and strengthening and governance. I think all of those are eventually our programs.

There may be disagreements on the details, but again, we can argue with good reasons and alternatives which make sense. Our track record, however, is very weak here, so the IMF is cautious in providing more relaxation.

Q: Is Indonesia now a best test case for the IMF's effectiveness?

A: Yes. The IMF is also in a very difficult position. It should be strict but it does not want to fail ...

On some points I don't think the IMF will give up but on other points it can't stay with Indonesia forever if conditions worsen. (I. Christianto)