IMF REASONABLY HAPPY?
> Kadin Indonesia Bulletin <
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IMF REASONABLY HAPPY? |
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> Kadin Indonesia Bulletin < |
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April 12, 1999 The macro-economic situation is still improving, slightly. The rupiah rate of exchange at the time of this writing (10 April) is about Rp8,700 to a US dollar, just a bit stronger than last month. The monthly rate of inflation is flat, that is, the month of March has virtually no inflation. Interest rates begin to come down and foreign currency reserves are slightly up. on March 16, Ginanjar Kartasasmita, the economic coordinating minister, signed the letter of intent - the "Fourth Review Under the Extended Arrangement" - with the IMF. Such review has become a bimonthly affair. The next one will be signed on May 15, and so forth. In the Attachment it was noted that "The macroeconomic targets of the program for 1998/99 remain within reach", followed by a cautious congratulation: "These achievements are testimony to the resolute implementation of macroeconomic policies, although a number of constraints will contain the budget deficit well below the program target". Interesting to note that the IMF complains that the G.O.I. cannot spend enough. One such constraint is the spending on "Social Safety Net" programs, now popular with the donor agencies. Rp 18 trillion was made available, but the government machinery could only spend part of it. The "absorption capacity", to spend without waste and corruption, is not there. The IMF thinks that the crisis afflicted Southeast Asian countries for this year still cannot recover through exports and investments because of the unfriendly environment in East Asia where everybody is still economically sick. Hence these economies should improve their performance through pump priming domestic demand. In other words, government budgets could, and should, be expansionary, with courtesy of the IMF and other donors. They will help with the necessary aid to inject purchasing power into the domestic economy without the risk of high inflation. After the signing of the March agreement the IMF made available an extra $1 billion to Indonesia. But this will not be enough to cover the budget deficit for 1999/2000, projected at 6 percent of GDP. The inflation should be controlled at 15-20%. An additional support of $5 billion is still required, on top of the project aid that is already committed. The deficit must also be financed by realizing Rp 13 trillion privatization proceeds and bank assets recoveries of some Rp 17 trillion. Hence, the IMF expects much "self-help" from the Indonesian government. The assumption of exchange rate for 1999/2000 is Rp 7,500 per dollar on average. Such are the expectations of the IMF for the budget year 1999/2000. Of course these targets will be subject to reviews every two months. "A number of domestic and external risks apply to this outlook", it says. On the political front there is much greater uncertainty. The ethnic and religious violence in Kalimantan and Ambon has abated but everybody is still jittery. The capability of the security forces to protect citizens is very much doubted. General Wiranto invited some 300 foreign businessmen to the ABRI Headquarters on April 8, and said: "As the commander of the Indonesian Armed Forces, I promise that your investments will be safe here". But James van Zorge, chief of the political risk consultancy group Van Zorge, Heffernan & Associates, said Wiranto's speech "failed to fully assure foreign investors because the commitments he expressed were trite". Timothy Gray, president of U.S.-based Development Capital, said most businesspeople would wait until after June 7 general elections to decide on investing in the country. On the same day, many foreign businessmen also gathered in Jakarta to hear representatives of the major contending parties stating their economic programs or views. Kwik Gian Wie of PDI-Perjuangan (Megawati's party) would want to seriously consider reestablishing fixed exchange rates, to bring the rupiah to Rp5000-6000 per US dollar, in order to spur an economic recovery. But his party would first seek international support for such drastic move. Under the circumstances that would be an illusion. Faisal Basri, the secretary general of PAN and an economics lecturer, prefers capital controls to protect against massive speculation, but no fixed rates. Mari Pangestu, the noted economist and a panelist, does not foresee drastic changes in economic policies after the elections since among the contending parties there is no major objection against the IMF program and involvement. But implementation can vary in style depending which party will set the tone. "Economic justice" will be a great political commodity, also promise of empowering small businesses and cooperatives. (SADLI) |
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