The IMF factor

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.