What does IMF have in store for RI?

What does IMF have in store for RI?

Any day now, the International Monetary Fund is expected to
announce its reform package for Indonesia following negotiations
with Indonesian government officials. In the following discourse.
economist Kwik Kian Gie talks about what to expect from the IMF.

Question: The IMF will likely leave the national car project
alone. What have you heard?

Kwik Kian Gie: My sources tell me that the IMF felt that the
project would be shelved any way, because Indonesia would lose in
the World Trade Organization. Kia Motors, the parent company, has
already gone bankrupt and Timor cars aren't selling well. Those
banks that committed US$690 million face a force majeure because
of a liquidity problem and the rupiah's depreciation.

I believe the IMF should make it (the national car project)
part of its condition. It's a matter of principle, the car
project should be included among projects that have to be shelved
because it's not a priority.

In what form will the IMF assistance come? Will it be
effective?

It will be in the form of a fund and reform package. The money
is not likely to cover all of Indonesia's foreign exchange needs
for imports and repay the foreign debt of private companies. The
IMF money will calm the currency turmoil and may arrest further
drops of the rupiah. The rupiah's exchange rate will probably
settle at a certain level, like Rp 3,500 to the dollar.

The IMF money won't restore foreign banks' confidence toward
private companies. They owe so much money. The Economist
estimated that their total debt was double what the public knows.
That means around $120 billion.

Even if we had enough foreign currency reserves, these debtors
did not have enough rupiah in the first place. They have short-
term investments in real estate and long-term in factories. They
are accustomed to rollover their debt, or to borrow from one bank
to pay off loans in another bank. Now that option is unavailable
because many are defaulting on their loans. The IMF cannot help.

What about the IMF reform package?

We know what the IMF did in Thailand.

The IMF will set conditions as it gives the money. The
government will comply. Like Flipper, it is willing to do all
sorts of things when it's fed.

Will the IMF be convinced that the conditions will be met?

I think so. The piecemeal approach was used in Thailand. Many
Thai intellectuals were angered by the IMF terms. This
contributed to the Thai political crisis.

If the IMF uses the same approach in Indonesia, the
intellectuals will also be offended. We've already heard protests
against the IMF's involvement, all in the name of pride,
nationalism, sovereignty and the rest.

How relevant are their protests?

The government never heeded their suggestions, although they
were similar to those in the IMF package. It's not likely that
the government will heed them now. The decisive factor is whether
or not the government is offended.

Does this mean that the IMF officials will be sitting in Bank
Indonesia or the Ministry of Finance to make sure that their
reforms are implemented?

They are already doing that. The World Bank's permanent office
in Jakarta is the largest after its head office in Washington. It
won't surprise me if the IMF is placing its people here.

But I'd swallow the bitter pill one last time. The next
generation should commit themselves to be more self-reliant in
running the country. We will monitor the results of the IMF
package. If it worsens the economy, we should stop the IMF's
interference.

What will the IMF package contain?

It will include assistance for ailing banks and liquidation of
those beyond help. It will write off bad debt. It will call for
the elimination of subsidies and monopolies and the dissolution
of Bulog, the uprooting of corruption and postponement of
projects, especially those with high-import content. It will
propose slashing the current account deficit by narrowing the
saving-investment gap, which will lead to an economic recession.

The monetary crisis has affected prices and slowed down
business. Can the IMF package overcome these?

We have problems at several fronts. Besides the monetary
crisis, we are faced with a long drought and forest fires.

There are already signs of stagflation, a combination of
stagnation and inflation. Stagnation was bound to occur because
the IMF package would take us there. The objective conditions of
our economy require the postponement of projects to ease the
demand for dollars. Demand for property turns out to be very weak
compared to supply, and this will lead to stagnation.

The increase in prices caused by rising import prices, food
shortages and elimination of subsidies will cause inflation.

The IMF knows that the economy is subject to business cycles.
Europe and the United States are accustomed to the booms and
busts of the economy. They are used to economic slowdowns --
slower growth, companies and banks collapsing, construction
projects abandoned half-way through and rising unemployment.

The IMF fully understands that this is a normal process to
strengthen the fundamentals and structure of any economy, to
prepare for the rebound when the opportunity comes.