Mon, 14 Jul 2003

The IMF factor

There would appear to be no benefit at all to Indonesia if the country were to opt to completely disengage itself from any arrangements with the International Monetary Fund (IMF) later this year, as recommended last year by the People's Consultative Assembly, the nation's top law-making body.

The absence of any arrangement with the IMF after expiry of the current IMF facility in December may, instead, expose the country to greater risks of fiscal and external financing gaps and an erosion of market confidence in the country's economic reforms, especially given the likelihood of political turbulence in 2004, an election year.

Market acceptability is the key, according to Tarin Niimmahaemi, former finance minister of Thailand, which successfully completed its IMF program in 2000, only three years after the outbreak of its economic crisis.

So crucial is the factor of market confidence that Thailand did not abruptly end its arrangement with the IMF but opted for a gradual disengagement by first making a precautionary arrangement and then entering the IMF Post-Program Monitoring Scheme. Only after Thailand was absolutely sure about the strength of market confidence in its economy did the country completely end its special arrangement with the multilateral agency.

South Korea, which successfully graduated from the IMF program earlier in 1999, or only two years after the emergence of its crisis, followed a similar path.

What, then, is Indonesia's chance of abruptly exiting the IMF program? Certainly not as great as Thailand's and Korea's success stories. Until about two years ago, Indonesia was notorious for not only delaying its reforms but often backtracking on policy commitments. No wonder then, its economy has remained fragile even after almost six years of languishing in the IMF "emergency room."

Blaming the IMF for most of the failings in the handling of Indonesia's economic crisis and preaching that economic management would be much better without any special assistance from the IMF is simply an act of self-delusion. Indonesia's record on policy performance is yet too dismal to convince the market -- investors and creditors -- that it would consistently implement its reform commitments without independent international oversight, such as that provided by the IMF.

Indonesians who are staunch critics of the IMF may not realize that whatever the IMF's shortcomings may be, the market still trusts this institution more than the Indonesian government, which, infamously, is known as one of the most corrupt in the world. The IMF remains an opinion leader for creditors and investors. This is the market perception, however painful it may appear to the country's political leaders. We cannot simply disregard it. Market confidence is what has been largely responsible for Indonesia's strengthening macroeconomic stability since last year.

Minister of Finance Boediono is fully aware of the great risk inherent in an erosion of market confidence, as can be concluded from his repeated warnings of financing and credibility gaps if government reform strategy, after the end of the IMF program, did not create confidence among creditors, investors or the market in general.

Similar warnings were conveyed by the IMF's Jack Boorman, former deputy governor of Australia's Federal Reserve Bank Stephen Grenville and World Bank country director for Indonesia Andrew Steer, who discussed the IMF's role at a seminar here on Friday.

They asserted essentially that the IMF would not mind whatever form of relationships the Indonesian government might choose after the end of the current IMF program later this year, as long as the market believed in the policy commitment mechanism Indonesia would implement.

Given the continuing fragile economic situation, and in view of the political turbulence likely in 2004 and that credibility in the government's policy-making and executing capability has yet to be tested, the international market would be much more comfortable if Indonesia's economic management were to remain under independent international supervision, at least until the election of a new government later next year.

This has nothing to do with either national dignity or nationalism. In reality, we would be acting blatantly against our own national interest if we unnecessarily took the risk of losing market confidence, thereby forfeiting the momentum of the significant progress we have painstakingly made thus far, and further neglecting millions of unschooled children and people mired in unemployment and abject poverty.

Entirely disengaging itself from the IMF later this year, as Rizal Ramli and State Minister of Development Planning Kwik Kian Gie and a number of other economists and politicians have been demanding, would unnecessarily expose the country to great risks of damaged market confidence, as the government would have to repay completely its debts to the IMF. This would mean a sudden cut of more than US$6 billion in its international reserves, not to mention the loss of Indonesia's debt rescheduling facility from the Paris Club of sovereign creditors and a consequent steep rise in its foreign debt service burden.

However, gradual disengagement from the IMF, as Thailand and South Korea have done, would be far less likely to disrupt budding market confidence. A precautionary arrangement, or post- program monitoring, would, instead, reassure the market that there was a well-equipped, highly capable fire brigade around should a fire break out.