Global Policy Forum

By Bill Guerin

Despite growing "anti-IMF" sentiment among some Indonesian politicians, last month's draft budget for 2003 was crafted to appease the International Monetary Fund and ensure that the country continues to receive the remaining tranches of a long-drawn-out US$5 billion rescue program. This is the seventh letter of intent (LoI) between the IMF and the Indonesian government.

However, the House of Representatives wants the government to revise some budget figures to bring them more in line with current global economic developments and the real needs of the economy. This follows concern from businessmen who complain that the target proposed earlier by the government would harm their businesses because of current economic difficulties and shrinking export markets overseas.

The budget predicts that export growth will jump from 3 percent this year to 7 percent in 2003, and the Bank Indonesia promissory note (SBI) rate is predicted to fall to 13 percent next year from more than 18 percent last year.

Investing in SBIs, the main pastime for many banks during the past couple of years due to its high interest rates, will become less attractive. Such reductions in the central bank benchmark rate will drive bank lending rates lower and boost lending activity as loans became cheaper, which in turn will stimulate economic growth.

The rupiah is expected to trade at 8,700 to the US dollar. Crude oil is expected to fetch $20.50 a barrel. Increasing political tension in the Middle East, triggered by threats from the US to launch an attack on Iraq, have boosted international oil prices to about $29 per barrel. The fuel-subsidy cuts are expected to lead to a 20-25 percent hike in fuel prices. This alone may contribute some 2 percent to overall inflation.

A projected hefty 39 percent further reduction of subsidies on oil-based fuel and electricity, married to a 20 percent increase in tax revenues, will bring down the public-debt level. Total public- and private-sector debt is now at a staggering $210 billion. Targets for gross domestic product (GDP) growth of 5 percent and inflation easing off to 8 percent seem a tad cozy given current business sentiment.

Extra revenue will come from slapping value-added tax (VAT) on electricity and highway toll charges, and from higher property taxes, the usual suspects as it were. The subsidy cuts will further restrain the weak spending power of the average consumer. The economy continues to be driven mainly by domestic demand, which contributes about 75 percent of GDP, but not from the pockets of the low-income groups, who can scarcely afford anything other than sembako, the nine basic goods. The head of the Indonesian National Front for Labor Struggle, Dita Indah Sari, has said the government was placing more priority on pleasing the IMF by withdrawing fuel subsidies than on attending to the people's needs.

Recent increases in the minimum wage levels, if implemented, may have some effect inasmuch as the workers can buy more cigarettes to boost the rosy prospects of cigarette makers Gudang Garam and Sampoerna.

Most of the World Bank's financial assistance, an average of some $310 million per annum for the past three years, has been used to finance social services and basic infrastructure for the poor. Outgoing World Bank country director Mark Baird pointed out last month that though "only" 13 percent of Indonesians were living below the poverty line, large swaths of the population were living on less than $2 a day and vulnerable to sudden misfortunes, such as sickness in the family.

Wardah Hafid, coordinator of the Urban Poor Consortium (UPC), defines poverty more starkly from two perspectives: economic and social. She says people are regarded as poor if the earnings of a family of three to five members have less than Rp35,000 ($4) per week or Rp150,000 ($17) per month. Socially, the poor are families that work in the informal sector, such as pedicab drivers, street vendors or casual laborers.

The moneyed classes, on the other hand, continue to spend as if there were no tomorrow. Credit cards are being touted all over the place, every week there are major property exhibitions and Astra International, the largest local car (and motorcycle) maker, reports strong sales.

Baird praised the government for sticking with the IMF program through "constant setbacks and challenges to the discipline of the programs" and put his pennyworth in for the patient, prescribing five immediate steps to get back on the road to health. These included, not surprisingly, the usual pat remedies of improvement in tax and customs administration and a strong drive to sell Indonesia Bank Restructuring Agency (IBRA) assets.

Indonesia joined the IMF in 1967 but it was not until the economic crisis struck in 1997 that the government decided to ask for Fund assistance. IMF reviews are always accompanied by in-depth scrutiny of the government's financial position but never result in a magic medicine for the debilitating sickness brought about by the national debt. The country's total foreign debts in 2002 amounted to $130 billion or Rp1.17 quadrillion and domestic debts reached Rp657 trillion. Demands for flexibility on the part of the IMF make sense given that the alternative is that Indonesia, without such external assistance, could be forced, for the first time ever, to default on sovereign debt and bring about a huge loss of confidence.

But in June National Planning Minister Kwik Kian Gie launched a bitter tirade against the IMF, calling on the government not to extend the relationship when the current country program expires in November. The outspoken minister's attack led to much public debate and was billed in Jakarta as reflecting a split within the cabinet. However, though several legislators spoke in favor of booting out the IMF at last month's annual session of the People's Consultative Assembly (MPR), in the end the issue went nowhere. There was recognition that the cabinet's policy makers have found it tough to generate rapid economic growth under the prevailing circumstances, but the general gist of the debate was that somehow the IMF was to blame, not the government.

Kwik was left fuming in the wings threatening to support a class-action suit filed by lawyers against the IMF for recommending policies to the Indonesian government that had caused the country's economy to deteriorate further. Coordinating Minister of Economics Dorojatun Kuntjoro Jakti (Kwik's boss) and Finance Minister Budiono were much more pragmatic, and said little, at least in public, that could be taken as a weakening of the president's support for a continuing IMF role in the country.

Commission B wants the government to improve its bargaining position in dealing with donor agencies and would draft a new economic policy law to reflect this. The target for the taxmen this year is Rp219.6 trillion and for 2003 a whopping Rp260.8 trillion (US$29.2 billion), or 13.3 percent of GDP.

Given the notoriously inefficient and corrupt nature of the tax system, the authorities are likely to go after the easiest catches, such as big corporations, foreign companies and the existing individual taxpayers. The normal practice of demanding official and unofficial (illegal) payments to meet their tax-collection targets will further depress business sentiment at a time when many Taiwanese and South Koreans are making determined efforts to move their business out of Indonesia.

Both the Megawati Sukarnoputri administration and the previous one talked up their privatization programs as if they were going to be implemented in a real business arena, not one hindered at every turn by those whose vested interests in retaining their state-owned-enterprise "cash cows" and by the easy call that the family jewels should not be sold off to greedy foreigners. Now that politicking has begun in earnest for the 2004 election, these mischief makers may win the day.

Privatization targets will also be difficult to achieve given the stalemate over some of the sales, including the privatization of PT Semen Gresik and its subsidiaries. The director general for state owned enterprises (BUMN) in a performance report identified a mere 11 out of 161 BUMN as being commercially sustainable, while 145 of the state-owned firms are running at a loss.

On the other hand, successful privatization of some state-owned monoliths would be expected to drive them into healthy profits and efficiency, rather than the cash cows of officials, politicians and rent seekers. Waiting for their opportunity, these sophisticated white-collar robbers are ready to leap out and cry foul, claiming that selling off public companies is "unnationalistic" and "unpatriotic".

IBRA's recent success in asset auctions, though generating more than Rp23.5 trillion, lost some of its gloss when it was disclosed that the very people who owned them in the first place probably bought most of these assets back - at an average 25 cents on the dollar. And yet the budget projects a more than doubled level of income from asset sales to the private sector for the 2003 fiscal year, an unlikely scenario after State Minister of State Owned Enterprises Laksamana Sukardi's own admission that in the first semester of this year's target of Rp6.5 trillion, they only managed to bag Rp2 trillion.

The Investment Coordinating Board (BKPM) said two weeks ago that foreign direct investment (FDI) in Indonesia during the first half of this year dropped by 42 percent to $2.5 billion compared with the same period last year, while domestic investment plunged by 70 percent to Rp11 trillion. Without new investment Indonesia will forgo export growth and with annual external debt servicing forecast to rise above $5 billion from 2005 on, the economy can never produce enough revenue to afford that huge burden.

Another cause for concern is the amount of funds allocated to the development program. Some Rp54.5 trillion was proposed, less than the target for this year, and an amount insufficient to even start to generate economic activity and growth and create more jobs. Targeted spending for development for 2003 accounts for only 2.8 percent of GDP, compared with 3.1 percent this year.

Getting the asset sales program back on track will be a lot more difficult than just sitting back waiting for windfalls like the sales of Telkom and Indosat shares on the secondary market - which were simply passive privatization. There is little demand for shares in Indonesian companies. Capital Market Supervisory Agency chairman Herwidayatmo says there are fewer than 50,000 domestic individual stock investors, compared with about 2 million in the heady days before the market collapsed in 1998.

Though a "belt tightening" budget is badly needed to prune the budget deficit and improve fiscal sustainability, continued depressed growth rates will mean such a standard prescription for economic recovery will badly affect exports and investment levels. It will also make it difficult for the government to conjure up some interest in international financing to fund projects, create jobs and get growth rates up.

The central government actually gets in more money than it pays out and in the 2002 budget this surplus is almost $5.3 billion. But the reality is a deficit equivalent to 2.5 percent of GDP. Internal interest payments of Rp59.6 trillion ($6.5 billion) and external interest payments of $3 billion turn the surplus into a deficit of $4.2 billion.

This is the crux of what the IMF-Indonesia relationship is all about. The interest on foreign and domestic debt is a stranglehold that forces Indonesia to seek new loans in a vicious circle that traps the government within a master-servant relationship with the IMF and other international donors. This staggering debt and lack of room to maneuver suggest that an appropriate prognosis of the suffering ahead is that there will be still be much more pain before gain. Though the business community and the economy as a whole will feel this pain, the poor and impoverished will bear the brunt.

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