The discord on IMF and RI's difficulties

The discord on IMF and RI's difficulties

Tata Huberta, Economist, Washington D.C.

Indonesian media feasted on the rows over the role of the
International Monetary Fund (IMF) on the Indonesian economic
policy makers last week. On center stage was Minister Kwik Kian
Gie with his controversial statement. Meanwhile, a soothing
statement was made by Minister of Finance, Dr. Boediono, at the
sidelines of the meeting with the legislature on June 5, which
indicated that the government still would like to continue its
relation with the Washington-based Institution until the
expiration of its contract in 2003.

Minister Kwik first pointed out that the IMF loans to
Indonesia was basically meant to support Bank Indonesia's foreign
exchange reserves and nothing can be made out of that money for
budgetary purposes. This is correct. The IMF loans are basically
used by all the borrowing countries as some kind of a "balance of
payments support" which will add to the borrowing countries'
foreign exchange reserves.

This principle applies to all the borrowing countries. For the
countries in a desperate need of reserves, this kind of loan
proved its usefulness. But once the countries have reached some
level of stability, the need for a "balance of payments support"
diminish.

The second point raised by Minister Kwik was that Indonesian
taxpayers have to bear the interest rate burden while the loans
themselves were rarely used. This statement is only partially
correct. The IMF indeed charges a rate of interest to the
borrowing contries, called "the rate of charges". This is based
not on the US dollar but on special drawing rights (SDR), which
is a composite of interest rates of a number of major
currencies, i.e. US Dollar, Japanese yen, Euro and Pound
Sterling. This rate is a floating rate and reset weekly.

Currently the rate is set at 2.97 percent. Bank Indonesia, as
the holder of the IMF money, is able to invest the money in the
most optimal way, based on the return and risk of this
investment. If the IMF money is invested in the five-year US
Treasury Bonds, the IMF money will bear interest (yield) of 4.32
percents in the US dollar.

At the maturity of the IMF loans, the return of the
investment, computed in SDR, has to be matched with the interest
rate paid to the Fund. The net result will constitute the net
cost or net return, depending on the outcome of the investment.
If the exchange rates of the major currencies are stable, it is
always possible to come up with a net return rather than a net
cost to the government. If the dollar strengthens during the
borrowing period, the gains on such IMF loans are even greater.

The third point relates to the Letter of Intent agreed with
the IMF. Minister Kwik strongly indicated that the LoI is
basically useless. This issue on conditionalities of the Fund's
program is always contentious. This document, while formally is a
reflection of the government own policy, is basically a joint
document. The IMF's role in designing this document is
undeniable. However, its finalization rests also on the
negotiating skill of the Indonesian government to arrive at the
best policy mix. There was a time when the previous government
came up with its own proposal which was accepted by the IMF.

Yet, even then, the government's proposal was not that
significantly different with the Fund's recommendations.
Therefore, little can be argued that the LoI has so far served as
a common platform for the Indonesian government, the IMF and the
donor community. At a time when the government was filled with
inertia, the LoI served as the main guiding light for the
Indonesian economic strategy. If not satisfied, the government
could certainly also come out with its best policy alternatives
and discuss these with the IMF in an amicable way. So far,
nothing has been done that way.

What is rarely discussed is the catalytic role of the Fund's
program. While the direct benefits of the IMF loans are quite
clear-cut, the catalytic role of the Fund's program is certainly
less obvious.

First, the disbursement of the IMF loans normally serves as a
"seal of approval" for the other donor institutions (such as the
World Bank and the ADB) or countries to release their own funds.
When the IMF loan was frozen in the wake of East Timor's
incidents, the loans by other International lending agencies also
stopped.

Second, the completion of the Fund's review also constitute
one of the "prerequisites" of the loans rescheduling in the Paris
Club. This condition, clearly stated in their website, links the
request of the Indonesian government for further rescheduling of
the official loans to the "seal of approval" of the IMF.
Therefore, the severance of the Indonesian policy from the IMF
program should also consider what kind of cashflow that the
government would like to have a few years from now. If the
projected cash flow indicates that we need further Paris Club
rescheduling, we may have to be very careful with what we are
doing now.

Third, the "seal of approval" also relates to the market's
perception. The absence of such approval will prevent the
"market" from investing in Indonesia, either through portfolio
investment or foreign direct investment. They will see the
situation as a kind of risk that will prevent them from
considering any investment activity in this country.

This question has been raised a number of times. There are a
number of cases where such a contract can be dicontinued, such as
in the case of Korea and Thailand. They were able to complete
their programs with the Fund successfully so that at the end of
the arrangements they could declare to the world that they were
able to "graduate" from the Fund program. The market responded
well.

For Indonesia, the prospect of completing the program with the
Fund in 2003 is also not small. For the last few months, the
government was able to make progress in a number of areas of the
program. The market flooded the country with funds. The current
Indonesian case may have exceeded the progress made by the Thai
government at the time of their completion of the Fund program.
Therefore, the remaining one and half years can be used more
usefully in speeding up the reform process.

After completion of the program, the Korean and Thai
authorities continued to welcome the IMF guidance through the
"Post Program Monitoring". This is an instrument where such a
cooperation may help the countries continue to be on track on
their reform agenda. For Indonesia, this instrument might also be
useful as a replacement for the Fund program as one of the
"prerequisites" of the Paris Club loans rescheduling.

Therefore it is always possible for Indonesia to complete the
program with the Fund. And the completion of the program could
mark as our "graduation".

The Indonesian relation with the IMF may then have to be
treated in a very gentle way. A statement by an official such as
Minister Kwik in public could easily (the next morning) irk some
people among the management and the Board members of the
international lending institutions.

At the time when we are just "one lap" away from the finish
line, it will be more useful if such discourses can be switched
to the more meaningful discussion, such as "What is our agenda
after the IMF?"