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)