Wise move on IMF

Wise move on IMF

The government's decision to enter the post-program monitoring
(PPM) scheme with the International Monetary Fund (IMF) is indeed
the best course, with minimal risk to the country after the IMF
extended facility comes to an end later this year.

The decision, taken by the Cabinet on Monday, is quite wise
because it does not require the government to make early
repayment of its US$9.2 billion debt to the IMF.

Ending any special arrangement with the IMF, as some analysts
and Cabinet ministers had suggested, would have unnecessarily
exposed the balance of payments to great risks because the
government would have had to draw on its foreign reserves in
order to reduce its debt to the multilateral agency to less than
100 percent of its $2.8 billion quota.

The policy also conforms with the recommendation last year of
the People's Consultative Assembly (MPR) that Indonesia not renew
its program with the IMF after the expiry of its current
arrangement, because PPM does not require the government to
obtain IMF endorsement of its reform programs through a letter of
intent that would have had to be submitted quarterly.

Moreover, PPM does not involve new borrowing from the IMF. PPM
is simply the process an IMF member such as Indonesia
automatically enters if its debts to the IMF still exceed 100
percent of its quota by the time it completes its IMF-supported
reform program.

The Cabinet's decision also reflects high confidence on the
part of the government in its ability to design, manage and
implement its reform agenda without any special oversight by the
IMF and without any special financing (debt rescheduling) from
the Paris Club of sovereign creditors.

The move is even more progressive than those taken by Thailand
and South Korea, two crisis-hit countries, which earlier
graduated from IMF programs. Both countries first opted for a
precautionary arrangement with the IMF before they entered PPM.

IMF senior resident representative David Nellor welcomed the
government's decision on Tuesday, saying that it reflected the
success of reforms the government had thus far implemented. He
believed that market confidence would remain strong if the
government maintained the pace of its reforms on the right track,
as it had done over the past two years.

There is indeed not a single reason for Indonesia to repay its
debts to the IMF ahead of their installment period, scheduled to
last until 2010, even though the country's international reserves
now total more than $34 billion.

Maintaining a high level of foreign reserves is imperative
now, in view of uncertainty regarding the global economic
condition and political turbulence the country may encounter in
the 2004 general and presidential elections.

Moreover, the interest rate on the IMF loans is quite small
compared with the cost of borrowing from the financial market,
and Bank Indonesia has said it could even get a positive yield on
the debts by investing them in the financial market.

Hence, entering the PPM does not exact any costs on the
government. In fact, according to Nellor, Indonesia would
continue to have access to technical assistance from the IMF to
support the government's institutional capacity-building programs
in various sectors.

PPM only requires relatively intensive, though not binding,
policy discussion with the IMF. Instead of doing any harm, a
higher frequency of policy discussion with the IMF would help
enhance the government's credibility and support market
confidence in the economy, especially in the political transition
to a new government later next year.

The market is now awaiting the reform mechanism the government
will follow after the end of the IMF facility. Chief economics
minister Dorodjatun Kuntjoro-Jakti said a white paper on the
detailed reform program to replace the quarterly letter of intent
to the IMF would be announced by President Megawati Soekarnoputri
when she unveiled her 2004 budget proposal to the House of
Representatives on Aug. 15.

However the reform agenda will be designed, it should be
highly credible, to maintain market confidence in the
government's capacity in designing, managing and executing its
reforms and in maintaining its fiscal sustainability.

To be credible, the program should be realistic and clearly
outline schedules and targets for structural reform in the
fiscal, financial and monetary sectors, as well as the real
(business) sector. It is on this reform policy mechanism and its
implementation that the market will anchor its perception
regarding the future outlook of Indonesia's economy.