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.