Speeding up reform
The fourth letter of intent (LoI) that the government submitted to the International Monetary Fund (IMF)'s Managing Director Horst Kohler last week is not only more elaborate than its predecessor, covering a 53-point reform program, compared to the 35 points contained in the third LoI, which was hurriedly drawn up three weeks after President Megawati Soekarnoputri had installed her first Cabinet in early August.
The new LoI, expected to be approved by the IMF executive board in the middle of next month, is also highly ambitious in its targets. The ambitious set of sequenced policy objectives promised in the LoI is apparently designed to speed up reform measures, which suffered several delays, notably in the first seven months of this year when then president Abdurrahman Wahid was preoccupied with his fight with the House of Representatives.
Approval of the new set of reform programs by the IMF executive board will release the fourth tranche of the $5 billion extended facility and facilitate a one-year extension of the facility to the end of 2003.
Most important too is that the LoI endorsement will ensure smooth negotiations in February with the Paris Club of sovereign creditors on Indonesia's request for the rescheduling of debts maturing from April 2002 to the end of 2003. Without a new package of debt rescheduling, the fiscal deficit could blow out to an unmanageable level.
Similar to the third LoI, the new reform programs will still focus on the core areas that greatly influence macroeconomic stability: The financial sector, privatization of state companies, asset recovery, fiscal decentralization and legal reform and public-sector governance.
This is simply rational because without significant progress on bank restructuring, the sale of state companies and assets currently managed by the Indonesian Bank Restructuring Agency (IBRA), legal and governance reform as well as law enforcement, macroeconomic conditions will remain fragile and the recovery process will fail to gain a secure footing.
The government promises to implement bold measures to minimize tax evasion, broaden the taxpayer base and clean up the corruption-infested tax directorate general by setting up large taxpayer offices, strengthening an internal audit system, launching a national tax audit and reporting system and vigorously collecting tax arrears. It will also formulate in June a plan to improve procedures and strengthen the administration of the corruption-ridden customs service.
Other bold programs in the fiscal sector include a further cut in fuel subsidies and the development of a liquid and well- regulated market for government debts to facilitate the smooth handling of the Rp 650 trillion (US$65 billion) in government bonds that will begin to fall due next year.
The new LoI stipulates 10 points relating specifically to IBRA because this agency is responsible for the restructuring of the 11 recapitalized and nationalized banks, the sale of distressed assets and restructuring corporate debts.
The core elements of the efforts to improve public-sector governance are the establishment before June of an Anti- Corruption Commission, which will be responsible for investigating and prosecuting corruption cases, preparing an anti-corruption court and reforming the government's financial management and procurement systems.
Also included in the good governance programs is the third round of independent audits of major state companies such as the national aircraft manufacturing company in Bandung, the state railway company, PT Pusri fertilizer company, PT Semen Gresik and the civil servant pension fund.
The government reiterates its commitment to release major state companies to the private sector, despite the miserable failure of its privatization program over the past three years, acknowledging that the companies have often been exploited for the benefit of individuals and special interest groups.
The LoI is, however, nothing more than an impressive list of promises that have yet to be realized. But as the political environment is now much better than it was during the previous administration, the government is expected to be more capable of delivering on those promises. Moreover, the more stable political situation will decrease pressures on the rupiah and this well enable the central bank to ease its monetary policy next year. But given the poor policy performance so far, the government and the House need to strengthen their cooperation in pushing ahead with the reform measures, many of which are quite painful.
Further delays or backtracking would not only impair the economic recovery process but would also result in the annulment of $1.3 billion of the $3.14 billion in new loans pledged by the Consultative Group on Indonesia creditors.