Indonesia: Getting Cut Off by the IMF?

After a chilly two-day meeting, the fund's delegates haven't committed to resuming a $5 billion loan program -- and that's big trouble

It was all done in a very diplomatic way, but the message was clear. On Apr. 23-24, the International Monetary Fund sent a "review team" to Jakarta for two days of intensive talks. The message: The IMF delegates expressed "concerns" that Indonesia's budget deficit would blow out this year unless "concrete" and politically painful reforms were made immediately, such as removing fuel subsidies, collecting more tax revenue, and selling off nationalized banks. Indonesian Cabinet Ministers smiled, thanked the IMF delegates for their advice, and even promised to propose a revised budget to Parliament when it meets on Apr. 30.

At no time did the IMF state explicitly that it was pulling the plug on further aid to Indonesia, after pouring $12 billion in loans into the troubled economy since November, 1997. But in fact, that's what happened, at least for now, say economists who are familiar with the negotiations. Because of both sides' failure to agree on a plan that would have prevented a deficit blowout -- and could have persuaded the IMF to extend more loans -- the Indonesian economy appears to be on a course for disaster.

The IMF didn't slam the door shut in Indonesia's face. It left open the possibility that the country could still qualify for further aid. But the IMF delegation prepared to leave Jakarta without signing a "letter of intent" with the Indonesian government. That letter is required for the IMF to resume a three-year, $5 billion loan program that was halted due to concerns over lack of reform only two months after the IMF disbursed the first $400 million payment last December.


  Because Indonesia did not commit to making the painful reforms required to prevent the deficit from surging to a forecast level of 6% of GDP this year -- two-thirds higher than the 3.8% level set in the current budget approved by the IMF -- the fund is expected to refuse to sign another letter. "The IMF basically said, 'Trim your budget deficit, or you're not going to get your funding,'" says David Cohen, regional director of economic analysis at S&P MMS in Singapore.

Why is no progress being made on budget reform? Because the government has been stymied by a life-and-death struggle between President Abdurrahman Wahid and political parties that control 90% of Parliament. Those parties are attempting to impeach Wahid on corruption charges -- and on Apr. 23, they gained the support of Vice-President Megawati Sukarnoputri, whose prior refusal to join the impeachment attempt was Wahid's only line of defense. "Parliament is going to spend the next four months trying to impeach the President before they get around to the budget," says one government official, who asked not to be named.

As a result, Indonesia could soon find itself in desperate need of further IMF assistance. Because of the political instability, the Indonesian rupiah is trading at dangerously weak levels of nearly 12,000 to the dollar -- 80% less than its value of 2,400 to the dollar before the Asian economic crisis swept the country in late 1997. Economists recently cut their GDP growth forecasts for Indonesia this year from 5% -- the rate the country needs to keep up with population growth -- to a disconcertingly low 3.5%. "The downside risks have increased," the IMF noted in a statement distributed to reporters in Jakarta.


  The appearance of the IMF giving up on Indonesia could be devastating. The three-year program that commenced last September provided rough policy guidelines for the reforms that the IMF says Indonesia's economy needs to recover. As such, it was the only constant factor that existed in a country where the leadership is in question and government policy is generally adrift. "As long as the IMF is there, there is a clear, consistent policy direction," says Indrawati Sri Mulyani, professor of economics at the University of Indonesia in Jakarta. "It's not only about money. It's the only guarantee that Indonesia will stay on the international map of the investors, and also in the global economy."

It was a cruel coincidence that the IMF team, led by Anoop Singh, the agency's deputy director for Asia-Pacific, arrived during a two-day meeting by the Consultative Group on Indonesia, which includes the World Bank, the U.S., Japan, and other donor countries. The IMF delegates found themselves sitting in front-row seats for frank discussions that simply reinforced their own concerns and complaints.

Ranking high among those complaints is that since the vague Regional Autonomy Law took effect on Jan. 1, hundreds of local districts are demanding that they be paid directly by the IMF and not the central government in Jakarta. In addition, the government has failed to clean up corruption and incompetence at the central bank, and -- as the IMF sees it-- improperly detained Bank Indonesia Governor Syahril Sabirin for six months last year.


  Also, the government has yet to sell off nationalized banks and seize collateral to cover a $70 billion debt overhang. Bankruptcy-court rulings are being ignored by higher courts, which overturn them in favor of politically connected debtors. The government's decision to phase out fuel subsidies from Apr. 1 to Oct. 1 is too slow to take pressure off the national budget at a time when the rupiah is weakening. And Wahid's economic advisers recently insisted on total control over the IMF program, even turning down requests by IMF officials to meet with them.

The government's response to those complaints was not reassuring. At one point, Indonesian Finance Minister Prijadi Praptosuharjo said, disappointingly: "Indonesia has not given any response to the main concerns. For the time being, we are taking them as inputs." Unwittingly, he was simply giving the IMF the best excuse it has seen yet to say no to Indonesia.

By Michael Shari in Singapore

Edited by Douglas Harbrecht

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