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.