The IMF support

The IMF support

Much more important than simply being additional support for the balance of payments and strengthening foreign reserves, the International Monetary Fund's approval last week of the third tranche disbursement of its US$5 billion bailout fund for Indonesia serves as a new building block for the process of restoring market confidence in the country's economic-crisis management.

The decision by the IMF executive board is even more pivotal amid the heightened uncertainty about security -- one of the fundamental preconditions for an economy to function normally --, after the bomb blast last Wednesday at the Jakarta Stock Exchange building that killed at least 11 people and destroyed or damaged more than 180 cars.

The timing of the support could not be better as the Indonesian government is encountering strong international pressure to immediately disarm and disband militias and restore order in Atambua, East Nusa Tenggara, following the recent killing of three United Nations relief workers in the western part of Timor island.

The disbursement of almost $400 million in new loans reflects both IMF endorsement of the agenda of Indonesian economic reform for the next six months and a vote of confidence in the new economic team, whose announcement last month initially got a very negative market reception.

However, as IMF first deputy managing director Stanley Fischer warned, when announcing the decision in Washington on Thursday, the nascent economic recovery could quickly stall if market confidence does not take root.

Indonesia's economic reforms were indeed at a crucial stage. As IMF payments out of its bailout fund had frequently been delayed since 1998 amid political upheaval, corruption scandals and doubts about the government's ability to follow through on its reform program, the market sentiment toward the country's economic outlook remains fragile. The latest IMF move nonetheless will be helpful in influencing the market to give the economic team the benefit of the doubt.

The litmus test of the economic team's credibility will start immediately with the plan to increase domestic fuel prices next month in a long-delayed effort to gradually reduce the state budget deficit to a sustainable level. Inadequately prepared, this well-intended move could set off a new bout of social and political instability.

The government is facing quite a dilemma. Noting last week's protests across western Europe against high fuel prices might cause the government to have second thoughts about the planned measure and prompt another last-minute postponement at the expense of sorely needed fiscal consolidation.

Without a stable macroeconomic condition nothing else could happen. However, a stable macroeconomic condition is not sustainable without fiscal reforms, which are crucial for gradually lowering and eventually abolishing the budget deficit. They are also a precondition to the smooth implementation of intergovernmental fiscal relations, which are sorely needed to placate separatist sentiments in resource-rich provinces.

The 2001 budget proposal should also be submitted to the House of Representatives next month. How the draft budget reflects concerted efforts to prevent an explosive fiscal deficit through asset recovery, debt restructuring and privatization of state companies will determine whether the budding recovery accelerates or stalls.

How the economic team goes about executing its 10-point economic recovery acceleration program that it has flaunted since late last month will also test its credibility. Come December, the government will have to account for the execution of its reform measures during the last quarter.

The challenges for the economic team indeed remain uphill. The country is still saddled with a very fragile banking system and mountains of corporate debt and is struggling to reform government and legal institutions riddled with corruption.

Structural reforms in the corporate sectors are similarly pivotal for sustaining economic recovery because the health of the economy as a whole depends on the soundness of business units.

Barring a further worsening of security and political conditions, the IMF's endorsement of the reform agenda and the vote of confidence it gave through the approval of the third tranche loan will help improve the market environment for the economic team to carry out its tasks.