Will Candor Pay Off For Indonesia?

In return for IMF aid, Jakarta vows to air its dirty financial laundry

It was a surprising admission. On Jan. 18, before hundreds of economists, bankers, and diplomats at the swank Shangri-La Hotel in Singapore, Bank Indonesia Senior Deputy Governor Anwar Nasution described Indonesia's central bank as a "cash register for those who are close to power." Then again, that apparently is the candid truth. In December, the bank's first independent audit revealed that $7 billion in funds earmarked for emergency loans had disappeared. Auditors suspect some of the money was rerouted to an affiliate bank in Amsterdam.

Soon, such candor may become more common in Indonesia. As part of a new agreement with the International Monetary Fund to ensure that loans first pledged in 1997 keep coming, Jakarta has agreed to come clean on past government financial wrongdoing--not just at the central bank but also within the military and at state-owned companies such as oil giant Pertamina. It's all part of what's being described as a "new economic program," the 12th time Indonesian government officials and the IMF have revised their agreement in just over two years. Under the new terms, the agency will continue to help Indonesia slash its stifling bad debts if the government, now headed by reformist President Abdurrahman Wahid, rids Jakarta of the last vestiges of deposed President Suharto's 32 years of corrupt rule.

In addition to adopting Western standards of transparency, Jakarta pledges to take distribution of food staples out of the hands of old Suharto cronies. The government will control imports of rice and sugar with tariffs, while a new Commission for Business Supervision will break up the old monopolies and make sure new ones don't arise. And it will toughen penalties for corruption.

SOCIAL ILLS. But unlike heavily criticized IMF plans of the past, the new conditions also take into account wrenching social problems as the country of 200 million tries to get back on its feet. Jakarta will be able to run a budget deficit equal to 5% of gross domestic product, for example, so that it can reduce government debt while still providing economic aid to the poor. It will also be able to boost soldiers' and civil servants' pay--hopefully reducing their appetite for bribes. President Wahid could receive nearly a 300% raise.

The new terms for continuing previously pledged loans may disappoint many IMF critics who want to limit the Washington-based agency's role to helping ease liquidity crises, rather than reengineering entire countries. By agreeing to disclose audits of state agencies--and even the private finances of officials--Indonesia has consented to air more of its laundry in return for loans than any other sovereign nation.

But Indonesia's economy and credibility are so far gone that the IMF and Wahid government apparently believe that getting all the bad news out is the only way to regain investor confidence. "Rather than secrecy, I prefer transparency," says Emil Salim, a respected Western-trained economist and chairman of Wahid's new National Economic Council. "Let the investors see the risk they'll take."

Besides, Indonesian officials have no choice but to cooperate with whatever the IMF wants. Despite receiving $11 billion of the $12.5 billion in loans pledged by the IMF since 1997, Indonesia remains in desperate straits. Public-sector debt is now as large as its GDP. The government expects it needs to issue $85 billion in bonds to clean up its banking mess. The Indonesian Bank Restructuring Agency (IBRA), responsible for recapitalizing the country's six biggest banks by this year, doesn't have enough funds to finish the job. It plans to raise $10 billion by selling seized assets of deadbeat corporate borrowers to foreign companies. Yet two years of political and financial scandals have shattered investors' confidence.

GORY DISCLOSURES. There's a danger that the cleansing may backfire. Big public probes could discourage Indonesian businesspeople with funds parked offshore from investing anew, out of fear that they will be investigated and their holdings seized. Foreign investors could also choose to put their money in safer havens if confronted by more gory disclosures. For example, the public release in November of the audit of Bank Bali, which revealed that senior officials of the then ruling Golkar party pocketed $80 million from the bank after it was nationalized in 1998, scuttled the government's plan to sell the bank to Standard Chartered Bank PLC. IBRA had to shelve plans to sell other troubled banks as well.

Fears of spooking investors aren't unfounded. The government has already started to use audits to get tough on multinationals that invested in joint ventures with companies linked to Suharto's family in the early 1990s. Late last year, an audit of PT Paiton Energy, a $2.5 billion coal-fired power plant owned by Edison Mission Energy, General Electric, and Mitsui, showed that the payment of bribes inflated the project cost and resulted in overcharging Indonesian electric utility Perusahaan Umum Listrik Negara (PLN). The local shareholders included Indonesian businessman Hashim Djojohadikusumo and his sister-in-law Siti Hedijati Hariyadi, Suharto's daughter. PLN is suing Paiton in a Jakarta court to force the the company to lower the electricity tariff. "Foreign investors are not holding up as human shields for the Suharto family," says Jusuf Wanandi, director of Jakarta's Center for Strategic & International Studies. That prospect worries potential foreign buyers of power plants and factories. "You don't know whom to get in bed with anymore," laments a foreign banker in Jakarta.

Without doing something dramatic to restore its credibility, however, the government will be hard-pressed to dispose of an estimated $10 billion in nationalized assets under its control. Jakarta sorely needs that money to recapitalize banks and balance its budget. In December, IBRA failed to sell its 40% stake in PT Astra International, an Indonesian conglomerate that assembles and distributes Toyota cars as its core business, to a foreign consortium led by Gilbert Global-Newbridge. The reason, says a Jakarta-based foreign lender to Astra, is that the company did not allow outsiders to conduct proper due diligence on its finances.

To make sure such landmark deals close, Jakarta is sending heads rolling. The finance minister replaced IBRA's chairman, who in turn is proposing that Astra form a new board of directors. And senior international economists and bankers expect IBRA to ask Bank Negara Indonesia CEO Widigdo Sukarman to resign to take responsibility for more than $1 billion in bad loans to Texmaco Group, a textile and machine tools conglomerate run by former Suharto favorite M. Sinivasan. With Widigdo gone, Jakarta hopes to raise $28.6 billion in bonds to recapitalize the bank by June.

The trick will be not to go too far. In late December, Wahid tried to replace Bank Indonesia Governor Syahril Sabirin, potentially violating the law guaranteeing Bank Indonesia's independence from the government. Wahid sought support from Parliament Speaker Akbar Tandjung. So far, Akbar has failed to take action. "It would have defeated the whole purpose of transparency--to uphold the rule of law," says a senior Indonesian official.

Whatever the risk, it's clear that Indonesia has more to lose by not adopting transparent policies than by embracing them. "Sure, there's a risk in it," says Bruce Gale of Political & Economic Risk Consultancy in Singapore. "But the risk is worse if you don't do it." For the moment, that is one point on which the IMF, Wahid, and his inner circle appear to agree.

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