What's new in the IMF program?
What's new in the IMF program?
By John Dodsworth
JAKARTA (JP): Amid the many social and political developments
of the past few days, one could miss the significance of
yesterday's announcement of a new IMF letter of intent (LoI) and
the proposals for the FY2000 budget.
Economic policy has tended to lose definition and momentum,
and generally taken a back seat, over the long period of
political transition from the previous government. Yesterday,
the democratically elected government of President Abdurrahman
Wahid tried to seize back the initiative by announcing an
ambitious economic program designed to recoup for Indonesia lost
confidence and credibility -- both domestically and
internationally.
It need hardly be said that Indonesia needs such a program,
as the process of economic recovery (which is crucial to
attaining social and political stability) has lagged
disappointingly behind neighbors in the region.
So, what is new about this latest economic program? The LoI
specifies the direction of economic policy in three main areas:
* A budget and monetary policy mix that would support growth
of at least 3-4 percent this year, while keeping inflation in low
single digits;
* A concerted effort to speed up, and make more effective,
bank and corporate restructuring, without which future growth
will not be sustained; and,
* A brave attempt to battle economic corruption by improving
governance and bringing into the open the manipulation of public
institutions by narrow interests.
This year's budget should be interpreted as a "first step" in
a multi-year program that is aimed at (i) increasing revenues
through tax reforms and fairer tax administration; (ii) reducing
very large public-private sector pay differentials (iii) giving
greater fiscal autonomy to the regions; (iv) reducing costly
subsidies but in a manner that mitigates the impact on the poor;
and (v) lowering Indonesia's dependence on foreign debt.
These are all difficult and contentious areas where objectives
can only be achieved over several years. Let me make a few
points without attempting to be comprehensive. First, on energy
subsidies, the Fund has taken a very flexible position,
understanding the importance of maintaining social stability at
this point of political development.
The government wishes to signal its intention of moving
gradually in the direction of reducing subsidies, but it will be
ensured that any moves will be gradual, take account of
prevailing social conditions, and adequate compensating measures
would be simultaneously introduced to soften the impact and
protect the poorer sections of society.
Second, the fiscal decentralization process has continued in
this budget with higher development spending allocations to the
regions, but the major changes in this area, as foreseen by the
existing legal framework, will take place only beginning in 2001.
The government has shown itself fully aware of the dangers of
losing macroeconomic control by transferring substantial revenues
to regions without having corresponding transfers of expenditure
responsibilities, and ensuring sufficient accountability.
The fiscal decentralization process for Indonesia is an
indispensable, but very large undertaking that needs to be
carefully planned and administered so as to maintain equity among
the rich and poorer regions.
A final point on the budget is that this year's deficit of 5
percent of GDP is expected to be financed equally by foreign and
domestic financing -- the latter comprising receipts from
privatization and asset recoveries from the Indonesian Bank
Restructuring Agency (IBRA).
The plan for domestic financing is clearly ambitious (compared
to the past record), but such a plan is critical if the
government is to meet its objective of gradually reducing the
burden of foreign debt to a more manageable level.
Achievement of the target will require, among others, that
IBRA enjoy full political support in following its mandate to
maximize valve for the country in the disposal of the assets that
it holds. In turn, this requires that IBRA's independence be
jealously guarded and that it is administered by professionals in
a transparent manner.
The second major element in the LoI relates to how the
government can help restore a functioning banking system -- that
can efficiently allocate credit -- and how the large non-
performing debts of the past can be regularized so that
businesses can once again become creditworthy, the country's
assets be better utilized, and trade and credit flows resumed.
Structural reform is never an easy task in any country because
it usually challenges vested interests, and it requires the day-
to-day attention of top policy makers. Largely because of
political constraints, Indonesia has a somewhat disappointing
track record in implementing structural reforms compared with the
other Asian crisis countries.
In the new economic program, however, the government has
adopted a more forceful strategy, under which it will move with
greater urgency to complete the recapitalization of the state
banks, to transfer the banks that were taken over back to the
private sector, and enforce greater discipline through more
rigorous bank supervision.
The previous approach to corporate debt restructuring has also
been revamped. Under the new strategy the government is prepared
to take a tougher line with those large debtors that do not
negotiate in good faith with their creditors.
It is in the public interest that the situation of these
debtors is resolved and it is, therefore, envisaged that the
Attorney General will be able to refer any non-cooperating
debtors to bankruptcy proceedings. In this area, the newly
formed Financial Sector Policy Committee, chaired by Coordinating
Minister for Economy, Finance and Industry Kwik Kian Gie, will
play a pivotal role in giving fresh impetus to corporate
restructuring and overseeing the work of IBRA and the Jakarta
Initiative Task Force.
The third element, and this could become the hallmark of the
current government, is the adoption of measures that attempt to
rebuild confidence in public institutions. Again, this is not an
easy task. Such confidence can only return if the government
takes forthright steps to combat corruption and inefficiency --
and to reveal and pursue wrongdoings of the past -- so as to
change the underlying modus operandi of relations between
business and government.
The new LoI contains many initiatives to further these aims,
including a comprehensive program of audits of public
institutions, along with necessary follow-up or corrective action
programs to address the concerns that are raised. Investigative
audits would be used where needed.
Given the importance of upholding the rule of law, a task
force, headed by the Attorney General, will focus its work
initially on court corruption, investigating any possible
malfeasance by judges or lawyers.
The public sector's own operations will also be made more
transparent, in part, and by taking into account, in future
internal audits of government departments, all extrabudgetary
sources of support. The operations of private foundations --
some of which are closely related to public institutions -- are
also to be brought under closer scrutiny and review.
I have mentioned only a sample of the policies included in the
government's new economic program, but it will be evident that
Ministers face a massive challenge of implementation. Confidence
and credibility will be regained in part by having this strong
program - which will be considered by the Executive Board of the
IMF in early February -- but even more importantly, the program
has to be implemented decisively and on time.
From what I have seen so far, the government is ready to take
ownership of this process, and to vigorously pursue
implementation of the program.
The writer is IMF's Senior Resident Representative in Jakarta.