July 29, 1999
Jakarta - A new Indonesian government which is expected to be formed later this year would most likely force the International Monetary Fund to renegotiate its harsh economic measures, said a prominent economist. Sri Mulyani, an economist at the University of Indonesia, said on Wednesday the future government would not have "a sense of belonging" to the current IMF economic reform programs. They were designed together with the present administration, deemed by many as lacking in political credibility. "There is no guarantee that a new government will stick with the (current) economic reform programs," she told a seminar on the Indonesian post-election economy held to celebrate the 10th anniversary of the Warta Ekonomi economic weekly.
"This is a general problem with launching economic reform programs in developing countries." Indonesia is scheduled to elect a new president in November. The two leading contenders for the presidency are popular opposition leader Megawati Soekarnoputri of the Indonesian Democratic Party of Struggle (PDI Perjuangan), and the incumbent President B.J. Habibie supported by the ruling Golkar Party.
The IMF has not had any cause for concern that a new government would not recognize fund-prescribed programs. The position was evident after IMF first deputy managing director Stanley Fischer received assurances in June from leaders of the country's top five political parties resulting from the June 7 legislative elections. Such confidence is reflected in the government's new Memorandum of Economic and Financial Policies signed recently with the IMF which says: "There remains a strong consensus for the economic program and its continuity is expected to be safeguarded." A back down from the earlier commitment could affect market confidence in the economy.
"Although several political leaders have given Fischer their commitment, once they're already in office for one or two months they'll realize that some parts of the program are not suitable," Sri Mulyani said. "But this (a renegotiation) isn't necessarily a bad thing. I think Washington has already prepared contingency plans," she added, referring to the IMF home base.
The IMF is organizing some US$46 billion in bailout cash to help finance Indonesia's economic reform programs. The fund has so far disbursed more than $9.5 billion out of its total commitment of some $12.3 billion. Kwik Kian Gie, a senior economic advisor to Megawati, recently proposed a fixed exchange rate system for the rupiah against the current free float system. Faisal Basri, an economist with the National Mandate Party (PAN), also one of the top five political parties, has in the past proposed a Malaysian style of foreign exchange control.
Some politicians have criticized the IMF economic programs, particularly as they seem to benefit foreign investors picking up local assets at bargain prices. Indonesia's economy was the most badly hit by the economic crisis that started to plague the region in mid-1997. The economy contracted by some 13.68 percent in 1998 with inflation skyrocketing to more than 77 percent. Millions of people have been laid off as many companies have either gone bankrupt or significantly reduced their production capacity. Some 66 banks were closed down.
Several macroeconomic indicators, however, have started to show signs of an economic recovery during the second quarter of this year. Inflation has dropped, the rupiah has strengthened, and the economy grew by 1.8 percent in the second quarter of this year compared to the same period last year. "But macroeconomic stability is still very fragile," Sri Mulyani said, pointing to the banking system, which is still not operating efficiently and the huge corporate overseas debt problem. Sri Mulayani said the post-election government would still have to deal with the grim economic conditions, including the country's already huge foreign debts. At the same time it would have to secure financing sources to finance the various subsidy programs. "This will be the biggest challenge of the upcoming new government." She said Indonesia's total overseas loans as of March this year amounted to $152 billion, compared to $110 billion during the pre-crisis period. The country's debt service ratio was now running near the alarming 60 percent level, she said. (rei)
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