Rupiah could worsen with further IMF delay

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)