he signing of the LoI with the IMF was a milestone in the still young Megawati Sukarnoputri administration, and she herself had a lot to do with it. It also marked the end of the period of erratic and ineffective leadership of Abdurrahman Wahid and his chief economic minister Rizal Ramli who managed to derail good relations with the IMF since December 2000.
Then President Megawati made the right choices for crucial posts in her new cabinet. Three portfolios are the most important for handling fiscal and financial matters, i.e., the finance minister (Prof. Dr. Budiono), the minister controlling state assets (Laksamana Sukardi, an experienced businessman of her own party), and the economic coordinating minister (Prof. Dorodjatun Kuntjorojakti who was called back from his post as Ambassador to the US).
The election of Hamzah Haz as Vice President was definitely also an asset.
Right after Megawati was chosen as President to succeed Abdurrahman Wahid, the foreign exchange market reacted strongly in her favor. The rupiah strengthened by 30% in a very short time, prompting concern from some new ministers that exports will be affected negatively. Exports were not growing as well as a year ago, but this is related to the softening of the economy in the US and Japan. The government is more bullish with the prospects for next year and dares to estimate economic growth at 5%.
The first good effects of the new Megawati government have been more a product of market sentiments, i.e., the hope that under Megawati’s leadership government performance will be much more effective than under Abdurrahman Wahid, not only for the economy but also for peace and order, and the upholding of the rule of law. At the moment, this is still more expectations rather than reality. But the general consensus is that the priorities of the government, which only has three years until the general elections of 2004, are in the right direction, i.e., economic recovery, restoration of peace and order and maintenance of the unity of the Republic (i.e., preventing its break-up).
The political support for Megawati in Parliament is broad. Very important is also the support of the military faction. In the cabinet, security and interior affairs are headed by retired generals with a lot of administrative and political experience.
After the LoI has been signed, the agenda is to lobby the Paris Club for a new round of bilateral debt rescheduling which can save about $3 billion of repayments. In the new LoI the government also promised to review the 2001 budget. The strong rupiah may not help much to reduce the deficit because revenues from oil and foreign aid will go down in rupiah terms. Revenues from taxation and sale of IBRA assets, as well as from privatization of state enterprises, are falling short.
The draft budget for 2002 is now submitted to the parliament. The foreign press and donor community have signaled support to the prudent and conservative budget. Under extreme financial constraints the proposed budget still wants to allocate more for spending in the social sector, like education, and programs which will help the poor. Part of the domestic public is apprehensive of the announced cuts in subsidies for domestic fuels, especially diesel oil and kerosene, because fuel prices will rise 30% on average, but the government insists that some of the savings can be used for direct assistance to targeted poor households.
Most of the expenditures of the proposed budget, however, will go to payments of interest of the government bonds held by the banking sector to meet prudential requirements. In 2001 such payments have helped to keep those banks liquid and were even the major source of declared profits. The banking sector is not operating normally as yet, i.e. in its lending to the real sector.
At the moment, the only fact we have is the positive sentiment in the foreign exchange market. Will the Chinese capital, said to be parked abroad by tens of billion dollars, and new FDI from Japan, Asia and the West come in soon? Probably the big players will still wait and see, especially what will happen in the sphere of rule of law, sanctity of contract, local harassment in the regions, labor disputes, etc. In this respect, the new labor minister has promised to reduce strikes by actively managing the tri-partite dispute settlement mechanism. He is a PDIP (Megawati.s party) man and was chairperson of the national federation of labor unions. (SADLI)
