Should the International Monetary Fund ease up on Indonesia? The huge tropical country of more than 210 million people is Exhibit A for critics of the IMF. They say its policy of imposing wide-ranging conditions before providing aid diverts the fund from its primary mission -- providing aid to countries in need. Even the IMF has agreed with many of these criticisms. But it still hasn't backed off, according to Indonesian Finance Minister Rizal Ramli.
In blunt remarks made during an interview with BusinessWeek's Asia Regional Editor Mark L. Clifford shortly before the latest IMF team arrived in Jakarta on July 5, Ramli said that the IMF visits are making things worse. Although the IMF is supposed to help stabilize the currency, high-profile remarks during IMF visits typically send the rupiah plunging. Indeed, during the last visit, in April, Indonesia's central bank spent $200 million to stabilize the currency as the two sides sparred over a $400 million loan disbursement. Here are edited excerpts of their talk.
Q: What is your take on the conditions the IMF has laid down before dispersing loans to Indonesia?
A: At one point, one-and-a-half years ago there were 140 conditions. Most of them have nothing to do with the basics of the IMF, which are financial and monetary stabilization. [The many conditions] get into different areas that are beyond the professional competence of the IMF. If there is too much conditionality, there is a tendency to micromanage. And because conditionality isn't supported by professional understanding of the local issues, some of [the conditions] backfire.
There are four presumed benefits of the IMF programs. One is restoring confidence. We have been under the IMF program for three years, with numerous agreements. The confidence isn't coming back because the key problem is political instability and security. Once we're able to stabilize the political situation and security affairs, the confidence will come back.
The second presumed benefit is that the IMF program will bring in private capital flows. After three years in the program, there is an inverse relationship. [Despite] numerous IMF seals of approval, private capital [is still leaving the country]. The key is stability and security.
The third [supposed benefit] is the IMF program helps stabilize the [currency]. They have done a lousy job on this one. In fact, every time a review team came in the last three years, the rupiah dropped because they make very high-profile critical statements. [As a result,] we have to intervene to stabilize the rupiah. The last review team to Jakarta [in April] cost us about $200 million [in terms of central bank intervention to stabilize the rupiah].
The fourth presumed benefit is that the creditor countries gang up against Indonesia if we don't get IMF approval. This is the most serious threat. [Now, though] some of the countries and multilateral agencies are softening because they know that this excessive linkage to the IMF is destroying rather than helping Indonesia.
Q: At this point, how would you judge the state of the Indonesian economy?
A: In 1998, the economy contracted by 14%. There was 17% inflation and food scarcity. It was the largest economic contraction in Indonesian history. At the end of the Habibie government, Indonesia entered a stabilization stage. Last year we registered 4.8% growth with a smaller budget deficit than planned. This was above what analysts predicted.
If you look at the real indicators [now], retail sales are growing significantly. Sales of motorcycles [which] are used [mostly] by the lower and middle class grew 70% last year. Electricity usage grew 8.5% in spite of a price hike. Last year, our exports were $62 billion, above [the $50 billion in] the plan. That created a $28.6 billion trade surplus. Most of the increase in nonoil exports was driven by [volume] growth rather than price increase.
Last year, we created 1 million jobs which is [equivalent to] one-third of the Singapore population. Unfortunately the Suharto regime left us with 33 million unemployed. This year, we expect some slowdown because of the worldwide economic slowdown, but we still expect to grow 3.5% to 4.0%. In the first quarter we achieved 4%, and it's quite respectable compared to others in this region. The weakest point in the economy is the exchange rate, which is mostly driven by continuous political instability.
If you look at the fundamentals, there is a balance-of-payments surplus, a significant trade surplus because exports are doing well. That should give strong support to the rupiah. [But] because there is continuous political infighting, the rupiah is continuously undervalued. The central bank increased interest rates [in an attempt to stabilize the rupiah]. It is not going to work. The source of the eroding rupiah is political.
Q: Has there been improvement in the level of compliance with tax laws?
A: The Indonesian upper-middle class is very, very rich -- but most of them don't pay taxes. It's unfair. We intend to push [increased tax compliance]. We have no intention [of increasing] the [25% maximum personal tax] rate. [An announcement to this effect increased the number of taxpayers from 1.3 million to 1.9 million.] It's a very small [percentage] of 50 million households. We have 4 [tax avoidance] cases we are going to bring to court shortly to bring shock therapy to the system.