Turning to the IMF

Turning to the IMF

The government's decision yesterday to seek help from the
International Monetary Fund (IMF) and other international
agencies was inevitable. The writing had been on the wall these
past few days, with the rupiah continuing its slide day after
day, at times almost by leaps and bounds. It even hit a historic
low of Rp 3,850 to the dollar on Monday.

Confidence in the currency, and in the government's ability to
save it, had been fast slipping away. Each plunge further eroded
whatever trust was left. The rupiah's exchange rate was no longer
determined solely by the so-called fundamentals of the economy,
but more by psychological factors, of which confidence is
probably the most important.

With confidence in the government's ability at a low ebb,
there was very little it could do, save renewing its appeals, as
it did on Monday, for people to refrain from joining in the rush
to buy dollars in a bid to ease the pressure on the rupiah.

Many people had hoped the currency crisis was a temporary
monetary phenomenon. But as the crisis continued, it was
beginning to undermine the real sector.

There have already been reports of many companies being on the
verge of defaulting on their bank loans, and others heading
toward bankruptcy. If this happens it would set off a banking
crisis, especially since many banks are already in trouble
because of the currency crisis. There is also the prospect of
massive layoffs if the economy plunges into a deep recession.

In short, the cost would be too much to bear if the currency
crisis was allowed to go on. The first priority now is to save
the rupiah and restore the market's and public's confidence. The
government cannot do this alone. It has done almost everything
expected of it, but it cannot change the negative sentiments
prevailing in the currency market. Turning to competent foreign
institutions, like the IMF, is the only viable option left to
stem the rupiah from a further slide.

The government's decision to turn to the IMF, in view of the
latter's record of insisting on tough economic reforms, is
obviously a last resort. There are concerns that the government
would have to hand over part of its sovereignty to this foreign
institution in running the economy. The recent experience of
Thailand -- which received a US$17.2 billion bailout with severe
conditions from an IMF-led consortium -- should serve as a
warning.

Since the decision has been taken, Indonesia must now be
prepared for whatever medicine the IMF prescribes to save the
economy. Minister of Finance Mar'ie Muhammad, in announcing the
plan to ask for IMF help yesterday, did not give details of how
much aid Indonesia is seeking, and how far the government is
willing to be dictated to by IMF. These will be determined during
negotiations. The appointment of veteran economist Widjojo
Nitisastro to head the Indonesian delegation in the negotiations
is most appropriate given his immense experience in handling the
economy and in negotiations with foreign aid donors.

A bit of IMF medicine is probably what this country has needed
all this time. The various economic reform packages we have seen
these last few years had been halfhearted measures, reflecting
more the powerful corporate lobbies and less the real priority,
or economic realities. We do not need to look far behind for
examples. In response to the first round of the currency crisis
last month, the government shelved costly and vital
infrastructure projects, but spared equally expensive but less
urgent projects.

The IMF will be less susceptible to local corporate lobbies
and it could insist on thorough economic reforms that Indonesia
has needed all along, but the kind the government had not been
able or willing to implement. It may be a bitter pill to swallow,
but if that is what it takes to cure our economic ills, then so
be it.