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.