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.