Sensible recommendations

Sensible recommendations

The policy recommendations issued by the Indonesian Economists
Association at the end of its 15th National Congress on Tuesday
were surprisingly sensible, especially with regard to its policy
advice for after the International Monetary Fund program ends
later this year.

One would have expected revolutionary, political
recommendations, given the heated debate about the role of the
IMF and other international creditors in Indonesia, and the
strong anti-IMF stance promoted by several leaders of the
association.

But the association's recommendations turned out to be
economically realistic and politically sensible, not only with
regard to Indonesia's future relations with the IMF but also to
the policy directives it wants the government to follow after
exiting the IMF program.

The organization did not call for immediate repayment of
Indonesia's debts to the IMF far ahead of their installment
schedules, as several staunch IMF detractors have demanded at the
risk of weakening our international reserve position.

The economists only demanded that the government stop
submitting a quarterly letter of intent (LoI) on its reform
commitments to the IMF, as it has been doing since the 1997
economic crisis.

The letters of intent and their supplementary memorandum on
detailed policy measures were reviewed by the IMF before it
disbursed its loans.

It was these quarterly reviews that irritated many politicians
and analysts, because the policy dialog that preceded the drawing
up of the LoI was often acrimonious and the IMF was generally
perceived as acting magisterial. The differences of views which
took place during the reviews, and the politically unfeasible
scheduling of several reform measures at once, stung national
pride and the dignity of officials and politicians.

Terminating the quarterly LoI would allow the government to
make its own policies without any interference from the IMF, with
the consequence that the country would no longer be entitled to
special loans from the IMF or the debt rescheduling facility from
the Paris Club of sovereign creditors.

Almost all analysts, including those from the IMF and the
World Bank, share the view that Indonesia can manage without new
loans from the IMF or debt rescheduling from the Paris Club,
given the country's strengthening macroeconomic stability,
stronger fiscal position and high level of international
reserves.

The greatest concern is whether the government will have the
political will and ability to maintain its reform commitment
without any international oversight from the IMF.

The Indonesian Economists Association is quite right in
insisting on full authority for the government to decide on its
policies. Both the IMF and most other multilateral development
agencies also have increasingly realized that only homegrown
reforms with the support of a national political consensus are
sustainable.

But this is precisely the biggest challenge for the
government, including the legislative and judicial branches, in
view of the poor record of their policy performance and the still
dismal standard of governance in the country.

The government has significantly improved its policy
performance over the past two years but it needs to do more to
maintain market confidence, especially after the IMF program ends
later this year.

But here again we are encouraged by the association's
recommendations on the policy framework the government should
adopt. The policy advice in the association's six-page statement
read very much like the ninth LoI and its supplementary
memorandum the government submitted to the IMF last month.

The association's views will hopefully have a strong influence
over the economic strategy the government designs and announces
when President Megawati Soekarnoputri unveils the 2004 state
budget draft next month.

The government should devise a credible reform framework on
which the market can anchor its perceptions and expectations for
the economy. Since this framework will replace the LoI as, it
should also outline specific and time-bound measures to maintain
market confidence.

The government faces great challenges ahead because the end of
the IMF program will not spare Indonesia's policy performance
from the spotlight of international oversight. IMF oversight will
instead be replaced by the more vigorous supervision of the
international market.