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.