Welcome IMF surveillance, panel tells Indonesia

The following is the text of the letter dated Feb. 19 from the foreign economic advisors appointed by President Abdurrahman Wahid. The advisors, who arrived here last week, are Singapore Senior Minister Lee Kuan Yew, former U.S. Federal Reserve chairman Paul A. Volcker, former Japan envoy to Washington Nobuo Matsunaga and treasurer to Germany's opposition Christian Democrats Ulrich Cartellieri.

JAKARTA: Mr President, your advisory group has felt it worthwhile to record in this Aide Memoire a few key points arising from our discussions.

In doing so, we want to acknowledge the cooperative spirit with which a number of your able and dedicated officials have explained to us the challenges they faced.

We also appreciate and welcome the priority that you, personally, your Government, and the Parliament of Indonesia rightly attach to the truly historic effort to move the diverse and widely-spread peoples of Indonesia into a working democracy with social harmony.

Your understanding and leadership in that inherently volatile process have been, and no doubt will continue to be, tested by events.

It is in that framework, and in recognition of the fact that achieving economic stability and growth is critical to the success of your efforts, that we offer these comments.

We believe Indonesia is poised at a critical juncture. It must build on a year of promising but still highly-fragile and incomplete economic recovery.

That effort would be surely jeopardized -- indeed made fruitless -- by failure to address certain issues, some chronic, some new.

You will not be surprised that time and again, we are told that economic progress and reform are impeded by a sense of pervasive cronyism and corruption.

In that respect, much emphasis has been placed on the key importance of reform in the system of justice, and especially administration of the courts. In any country, dealing with such problems would require long and sustained effort.

What seems essential is that you signal to the country in unmistakable terms the necessity of undertaking that effort.

Other more directly-economic issues are inextricably related to the implementation of the program agreed with the International Monetary Fund (IMF) last year.

The administration of such a program is seldom or ever free of contention and friction in any country. Indonesia is not an exception in that respect.

However, success will be invaluable in supporting confidence at home and abroad.

The payoff, we are convinced, will be greater investment, sustained growth and rising living standards.

We make several points in that connection:

1. Implementation of monetary and fiscal policies is always subject to review in the light of new conditions. However, our sense is that the broad outlines of the agreed approaches remain appropriate.

2. The IMF and the World Bank are not alone in expressing concern about the pace, consistency and transparency of efforts by your government to speed IBRA (Indonesian Bank Restructuring Agency) asset disposals, to recapitalize the banking system, and to remove barriers to foreign investment.

Close IMF surveillance of those programs should be welcomed as a counter-weight to political or special interests that tend to impede or frustrate even-handed treatment of investors and rapid recovery of asset values.

3. There is concern that the clear and necessary political and social benefits of decentralization of budgetary authority could be undercut by lack of financial discipline by regional authorities.

Again, that concern is not limited to the IMF.

We welcome the efforts already undertaken by your administration to deal with and limit those risks, and feel those efforts should be reinforced as necessary.

4. The most difficult and critical issue that must be resolved is that of the authority and independence of the central bank.

We recognize that serious allegations have been made about the management of Bank Indonesia. We cannot judge these allegations, but agree that accountability for decision-making and management is important.

However, we do share the concern of the IMF that those concerns need to be dealt with appropriately, in a manner that reinforces rather than undercuts the essential insulation of the bank from partisan politics.

It is our sense that the present legislation before the Parliament does not achieve those purposes, and that consideration of it could become mired in partisan politics.

We would recommend that you allow a period of review and reconsideration, including withdrawal of the present legislation.

We recognize, Mr President, that some might suggest that Indonesia deal with these and other concerns without the frustrations inherent in IMF agreements and surveillance.

We would urge that you consider very carefully the clear risks of such an approach, risks that range far beyond the loss of immediate financial and budgetary assistance.

The symbolism of such a decision "to go it alone" would be powerful. Already fragile confidence of markets and investors, domestic and foreign, would certainly be shaken, undercutting the progress towards stability and growth.

In our judgment, there is another and more effective way to proceed, speeding the day when Indonesia might safely, and even triumphantly, be free of the close surveillance inherent in IMF programs.

That way lies in actions well within the authority of your government to deal with the legitimate concerns that we have outlined above, while looking towards understanding in the international community of the special challenges inherent in your objective of promoting a true democracy.