September deadline for LoI 'difficult to meet'

September deadline for LoI 'difficult to meet'

JAKARTA (JP): The September deadline for the signing of a new
lending agreement between the International Monetary Fund (IMF)
and the government may prove to be difficult to meet, as
uncertainty lingers over the life span of the current government,
economists warned.

University of Gadjah Mada economist Sri Adiningsih said the
impending People's Consultative Assembly special session may
result in a new lineup of economics ministers.

"It's only natural that the IMF would first want to ensure the
commitment of the new team before they resume their lending to
Indonesia," she told The Jakarta Post over the weekend.

She said the possible change in the government was most likely
the reason why the IMF only went as far as agreeing on a draft of
the lending agreement.

The government initially expected to sign the final letter of
intent (LoI) by last week, however only a draft was completed.

The final LoI will contain a set of economic reform targets,
which Indonesia must meet in order to obtain the fund's loan.

Indonesia's poor record of meeting the targets contained in
the current LoI caused the IMF to freeze a US$400 million loan
tranche last December.

The government and the IMF have said their priority is to sign
a new LoI before the Paris Club meeting in September.

Failure to do so would put at risk the debt rescheduling
agreement between Indonesia and its sovereign creditors under the
Paris Club. The meeting is slated for the first week of
September.

The Paris Club agreed to reschedule $2.8 billion in debts this
year, on the condition that the government sign a new LoI with
the IMF by March. Because the LoI was not signed, the group is
now free to collect the debts anytime this year.

There are concerns that the IMF will delay discussion of the
LoI until after a new government is formed, Sri said.

The Assembly's special session in August looks certain to lead
to the removal of President Abdurrahman Wahid.

Sri said that should a new government emerge, the IMF would
likely send a team to Jakarta to seek a commitment on the new
LoI, in what could be another time-consuming process.

"The IMF's stance will depend on the lobbying power of the new
economics team," she said.

Sri added that the new economics team should be able to pick
up immediately the work of its predecessors.

And there are further time constraints, with the IMF scheduled
to take a recess starting next week until Aug. 22.

Nonetheless, Sri said that even if Indonesia missed the
September deadline, it would not necessarily spell disaster.

"I don't think September is a set target, it's negotiable. If
the government can come up with the right reasons, the Paris Club
will understand," she said.

However, economist Dradjad Wibowo of the Institute for the
Development of Economics and Finance said neither the IMF nor the
government could afford to miss the deadline.

"If missing the deadline leads to a negative note from the
Paris Club members, this will be counterproductive for the IMF
itself," he warned.

He said the country members of the Paris Club would want to
prevent providing reserves for writing off Indonesia's bad debts.

But should they demand payment, it would send Indonesia
teetering toward bankruptcy, he said.

"Higher taxes and another fuel price hike to raise more money
are out of question," Dradjad said.

Defaulting on the payments on domestic bonds is also unlikely
because that would harm the banking sector, whose earnings rely
on government bonds, he added.

Dradjad said this situation would tempt Indonesia to default
on the payments on its foreign debts, a move the IMF would not be
pleased with.

"But this would be the best of the bad options," he said.

Separately, Minister of Finance Rizal Ramli continued with his
anti-IMF rhetoric, urging for reforms in the institution.

"The IMF has misdiagnosed (economic illnesses) in many
developing countries, causing their crises to deepen," Rizal was
quoted as saying by Antara news agency during a book launch last
Friday.

He said the IMF's most damaging mistake in Indonesia was the
imposition of a "super-tight" monetary policy, which led to the
country's banking crisis.

Rizal has been lashing out at the IMF since he took his
previous post as the coordinating minister for the economy.

His stance contributed to the friction between the IMF and the
government following the suspension of the IMF loans. (bkm)