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.