Welcome IMF surveillance, panel tells Indonesia

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.