WORKING WITH THE IMF SINCE 1997*

Oleh : J. Soedradjad Djiwandono
Gurubesar tetap Ilmu Ekonomi, Universitas Indonesia


GENERAL FEATURES

  • The issues and challenges facing President Megawati and her administration in terms of their relation with the Fund come mostly from the administrations before her. In this regard, discussing the current state of affairs of the working arrangement between the government and the Fund have to be viewed from the beginning of the Fund involvement in the Indonesia's efforts to address the crisis through the stand-by arrangements (SBA).
  • Prior to the 1997 crisis, the Fund involvement through Fund-supported program for Indonesia was during the Indonesian crisis in the late 1960's and early 1970's. For more than two decades Indonesia had been enjoying a very good working relation with the Fund without ever going to ask for using Fund facilities.
  • But, the financial turmoil in July 1997 that eroded market confidence on the economic management forced the Soeharto government to seek for the Fund help. In October 1997 the government of Indonesia signed the first letter of intent (LoI) that started the Fund's role in the adjustment programs that the Indonesian governments adopted to address the crisis.
  • From October 1997 to the present a total of 16 letters of intent or LoI had been agreed upon by the Fund. Letter of intent including the memorandum that is called Memorandum of Economic and Financial Policies are commitments by the government in the forms of various programs to be implemented which have been agreed upon by the Fund (Board of Executive Directors). Basically, the program comprises of monetary and fiscal policy adjustments and other adjustment policies to address imbalances. During the crisis, aside from the common feature of the Fund program for macro stability the other adjustment policies are in the form of comprehensive financial restructuring, economic reforms in the real sectors as well as institutional building, governance and transparency.
  • The 16 letters of intent comprise of 3 during the Soeharto period, 8 during Habibie, 4 Abdulrachman Wahid and 1 Megawati. The total funds amount to SDR 11.8 billion, whereby SDR 2.75 billion in Stand-by loan (SBC) and SDR 9 billion in the form of Extended Fund Facility (EFF). The total withdrawals amount to over USD 10 billion.
  • The whole programs including variety of quantitative and qualitative requirements constitute what is technically called 'conditionality' There are different kinds of conditionality, from steps to be taken prior to the Executive approval or 'prior action', performance criteria, structural benchmarks and program reviews

WORKING WITH THE FUND

  • President Megawati started to deal with the Fund since the last few months of Gus Dur presidency, in her capacity as Vice President. Out of his disgust with the Fund for not agreeing on his plan to replace the central bank governor he didn't want to deal with the Fund. The relation between President Wahid and the Fund was worsening such that implementation of different adjustment programs was stalled. The euphoric relation between President Wahid and the Fund that promised to improve the relation in the early part oh his administration was worsening. The Bank Bali case and the feud between the president and the governor of the central bank had been costly. Program review kept being postponed such that since the last LoI of September 2000 there was no loan disbursement until the change of government to President Megawati.
  • President Megawati took charge in resuming the talk with the Fund in June 2001, whereby some important decision was being made in fulfillment of some requirements that had to be done based on the latest agreement with the Fund. This had been followed with different steps that strengthened further the relation between the government and the Fund.
  • A new LoI was signed in August 27, 2001 and the Board approved a new disbursement of USD 395 million. The election of Megawati to the presidency and the formation of the new Cabinet were very well accepted by the market such that rupiah was strengthened from around 11.000 to 8.500 to the USD 1 in August 2001.
  • Some thorny items of disagreement between President Wahid and the Fund on the necessary adjustments of 2001 budget, the amendment of central bank law, privatization and sales of assets held by IBRA had been resolved which smoothen further the government relation with the Fund. The latest one as the new budget of 2002, which was approved by the Parliament.
  • However, the September 11 and its aftermath and the slowing down of the American and Japan and the European economy clouded the prospect of the economic recovery under the Fund-supported program. This development has been causing the very good start of President Megawati presidency to run out of steam. Uncertainty is returning, rupiah is weakening and economic recovery seems to go away at least for the time being.

TURNING POINT

  • A turning point, which produces an end of deterioration process from the crisis, is crucial. However, a good start is not a guarantee for a recovery, and even less so for sustainable development.
  • There are other important factors to be presence, namely;
  • Speedy recognition of the problems and well thought policy decision. In the face of contagion 'the sooner the better'
  • Good and consistent policies and consistency of implementation
  • A conducive world economic conditions
  • In Korea and Thailand the turning point was produced together with the change of government. But, the same governments (Soeharto and Habibie) negotiated the first batch of LOIs. The change of government in 1999 was credible. But, Gus Dur wasted the best momentum provided by positive market responses. The recovery didn't happen because Gus Dur didn't consolidate the initial steps with a consistent policy implementation.

PROBLEMS OF CONSISTENCY

  • These are examples of inconsistencies which damage the credibility of Fund-supported program:
  • A blatant inconsistencies came out early in the program implementation when the government announced to reactivate 15 big development projects which were previously included in the postponed ones due to pressures from Soeharto families and cronies.
  • At the outset of the program implementation, Soeharto intervention also damaging the execution of the decision to liquidate 16 banks. The monetary authorities had to succumb to the pressure to grant the purchase of a small bank by one of Soeharto's son who partly owned a bank included in the 16 liquidated banks. In addition Soeharto families who partly owned some of the closed banks sued the Governor of the central bank and the Minister of Finance in court, in protest to the government decision to liquidate their banks. The market perception deteriorated drastically due to these two decisions for revising the program as agreed upon by the Fund.
  • Bank Indonesia was confronted with constraints in implementing agreed policy for monetary tightening during the initial efforts to defend rupiah from severely depreciating. The Fund kept asking for Bank Indonesia to raise interest rates while Soeharto did not allow the central bank to do it. In fact, Soeharto instructed the central bank to lower lending rates to help the business community to resume their activities. It should be noted that Bank Indonesia did not enjoy its independent status until the enactment of the new central bank law in May 1999. Granted that high rate of interest policy is still debatable as to its effectiveness. But the inconsistency did a lot of damage to the credibility of policy implementation
  • In January 1998 Soeharto signed an LOI to the Fund, which in effect strengthened and improved measures, which were agreed upon in the first LOI. These included discarding monopoly practice in clove trading and Bulog (the state agency for food procurement) imports, abolishing subsidies to the aircraft industry (IPTN), and the national car project. All are Soeharto pet policies. The implementation of all these measures was long and winding such that in effect the old practices were continued.
  • Soeharto was playing with a dubious proposal from Professor Steve Hanke for implementing a fixed exchange system with a currency board arrangement (CBS), which created uproar among the G-7 leaders and the Fund. Instead of following the steps, which had been agreed upon in the negotiation that resulted in the second LOI, Soeharto wanted to shift in gear to follow a different path.
  • Banking restructuring has been very slow, to a large extend due to pressures from different parties to deviate from the agreed upon programs. The fact that IBRA, the Indonesian Bank Restructuring Agency, in three years of its existence already experienced 6 changes in its management attested the presence of different interest groups that kept fighting for influence in its decisions to favor their respective interests. Corporate restructuring has also been incredibly slow.
  • The fight between the government and Bank Indonesia over the central bank management since President Abdulrachman Wahid in power also shows a similar problem.
  • Until September 11 all the problems and challenges facing President Megawati originated from the previous administration. However, the terrorist attack in the US and the US-led response that triggers world economic recession has been causing additional challenges to causes much bigger challenges for the President and her Cabinet.
NOTE

Changes in government seemed to serve well in producing a turning point to stop economic deterioration in Korea and Thailand. To a certain degree it has also been the case with Indonesia. This seems to also be the case of changes (turning point) in IMF policy. Serious efforts to improve IMF conditionality, structural in particular, to make its operation more focus have been running in full steam after changes in its management, from Michel Camdessus and Stanley Fischer to Hort Kohler and Anne Krueger.

What to expect? The working relation between the GOI and the Fund under President Megawati seems to be in better shape. The Fund has been learning some lessons from managing crisis in Indonesia as shown in its views on budget deficits, corporate debts, and social implications of the crisis. The Fund has been working on streamlining its structural conditionality. Similarly, the Indonesian Economic Team has been showing the willingness to make adjustments required.

However, the problems and challenges facing them have been much more daunting, due to the continuing past practices of policy inconsistency and worsening world economic prospects. For example, facing a slowing down of the national economy the government cannot automatically resort to fiscal stimuli or loose monetary policy are. They are both constrained by the Fund conditionality. Flexibility in both the Fund as well as the monetary authority should be in order here. It is curious that even the IMF Representative made a public statement for the central bank to reduce interest rate lately.

In 1999 the world economy was in a better shape, the US economy was still actively playing locomotive to the world economy. Not now.

If there is any optimism, it has to be very cautious indeed.

Singapore, October 31, 2001.

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* Bahan dipresentasikan dalam Panel Ekonomi, The First 100 Days of President Megawati Political and Economic Perspectives, diorganisir oleh ISEAS, Orchard Hotel, Singapore 1 November 2001.