Waiting for IMF aid

Waiting for IMF aid

We will not be surprised to find out sometime later this week
or early next month that the reform measures to be prescribed by
the International Monetary Fund-led team as the condition for its
financial aid to Indonesia, will not differ greatly from what
domestic private-sector analysts, and even several members of the
cabinet, have often recommended in the past. The most significant
difference may be that domestic analysts do not have the
resources and clout to mobilize a huge sum of financial aid to
support their advice as IMF does.

Hence, we think, the highest commendation should be given to
the official, or whoever he may be, who has succeeded in
convincing President Soeharto to agree on calling in IMF as the
appropriate macroeconomic doctor with a high international
reputation. IMF's involvement in the management of the currency
crisis will surely strengthen the hands of the domestic reformers
who had so far failed to convince the government to take the
necessary measures before the problem assumed the critical
proportion the nation is now facing.

There are several great benefits in having IMF involvement.
This multilateral institution owns huge resources and has the
capability to act as the catalyst to convince other donors to
join in the financial aid it intends to package. For instance,
IMF pledged only about US$4 billion of the $17.2 billion aid
package to Thailand concluded in August. The other $13.2 billion
was contributed by other multilateral institutions and sovereign
donors who joined because they knew that the aid implementation
would be closely supervised by IMF.

Another benefit, which is quite crucial in view of the crisis
of international confidence in Indonesia's economy, is that IMF
participation will lend international endorsement to the reform
measures to be taken to cope with the financial crisis.

The consequence, though, is that the government will have to
swallow its pride and behave magnanimously in accepting the fact
that IMF will call many of the shots on the reform measures and
that the government's performance will constantly be under direct
IMF surveillance.

We think the government, as one of the world's largest
sovereign debtors, must have known that the IMF approach is not
fundamentally different from one member country to another.
Though its policy advice is not "one size fits all", as IMF must
take into account the different levels of development and
different magnitude of economic problems, the onus of its
macroeconomic policy prescription focuses on the broad areas of
fiscal prudence, highly competitive market condition, sound
financial system and good governance in its broadest sense.

This means that fiscal deficit, if any, should gradually be
abolished and subsidies minimized. Businesses should be subject
to a level-playing field, market distortions such as monopolies
and preferential tax treatment should be removed. Unsound banks
should be merged or liquidated. As these reforms require
sacrifices on the part of the common people, they often cause
political instability in countries where the government is not in
a strong enough political position to take all the bitter
medicine. Thailand's current political turmoil is a vivid
example.

No wonder, governments call in IMF only if they are compelled
by a crisis they cannot handle by themselves.

But as our economic condition was not as dire as Thailand, we
are more fortunate in that not many of the reform measures asked
for by IMF are highly politically sensitive, to the degree that
they impose the risk of political instability. Moreover, what the
government is asking from IMF is a kind of preemptive bailout.

We surmise that IMF will not be persistent in calling for the
abolishment of monopolies in rice and the removal of oil fuel
subsidies. But the monopolies in sugar, wheat flour, clove,
soybean, and market distortions in several other commodities such
as cooking oil, will likely be included in the reform package.
The liquidation of insolvent banks will have to be speeded up
irrespective of the political clout of their owners. Numerous
rules which are biased against exports will have to go. Trade and
bureaucratic reforms, transparency of policy making and the
awarding of concessions or contracts, which have all often been
commented on by the World Bank in its annual reports on
Indonesia, will also likely be in the agenda.

Such grandiose and commercially dubious projects as passenger
jet development and the national (Timor) car program have to be
postponed or shelved.

But we should keep in mind that the mere conclusion of an IMF
financial package would not automatically lead our economy out of
the woods. The standby loan agreed on will be disbursed quarterly
and each disbursement will depend on government performance in
implementing the conditions. This means the willingness and
capacity of the broader political system to pursue the reform
package.