Walking on a tightrope

op-ed ▪ policy

To part or not to part with the IMF, that is the question...

(24 April 2004, Jakarta Post) A tightrope walker is just recovering. In her last open-air performance, an unexpected rainstorm struck her down, causing serious injuries. Doctors agree that she is in a stable condition, yet are unsure whether she is strong enough to perform. However, her next show cannot be postponed, and as that day approaches, show officials deliberate.

A rather meek, conservative doctor thinks she might be not strong enough. Worried about recent storms, he suggests that, for the show, officials maintain the safety net currently used for practice only. Despite her continuing therapy and practice, he doubts she can weather the impending storm on the big day. A more gung-ho official doctor, however, disagrees.

He thinks that the safety net, previously never installed in a performance, would make her look amateurish. Moreover, he is confident she will recover in time. No matter what, the net must go. So, who is right?

You see, the funambulist is our economy. The crisis has seriously injured our economy, and throughout recovery, the International Monetary Fund (IMF) program has in effect functioned as its safety net. But now, as the end of 2003 approaches, government officials are deliberating whether to remove the net.

This deliberation is not unlike that between the conservative and the gung-ho doctor. Those in the gung-ho camp want a complete end to the program by returning all of the IMF money and having nothing more to do with it. Underlying their argument is the confidence that Indonesians are able to deal with their own economic problems. For them, the IMF represents a foreign intrusion that straitjackets Indonesian policymakers, making them appear incompetent.

On the other hand, conservatives are worried about the actual health of the economy. The economy is stable, true, but has not fully recovered. Growth is mainly driven by domestic consumption and government expenditure, not a good thing, since both will eventually saturate. Meanwhile, both trade and investment remain lukewarm, and with the impending storms, also known as SARS and the global economic slowdown, conservatives fear both trade and investment might stay that way for a while.

As an ardent believer in self-reliance, my heart goes to the gung-ho camp. I don't think the IMF was particularly successful in Indonesia: Its early mishandling of the banking sector and its insistence on micromanaging the economy cost the IMF its domestic credibility, although, to be fair, its program did contribute to macroeconomic stability. Hence, I agree with those who do not want the IMF to overstay its welcome.

Yet, however much I dislike having our policymakers be perceived as kowtowing to foreign authorities, I worry more about our funambulist economy. Walking on a tightrope, we cannot afford to allow our economy to stumble again. The injuries from a crisis would be much more severe the second time around. And lest we forget, for the most part, the brunt of it will be felt by the poor who cannot hedge financial risks by, for instance, switching to foreign currencies.

Hence, haste is harmful. To avoid it, let us try to objectively assess the challenges to be faced next year. These essentially amount to two things: government financing and policy credibility.

On financing, the government needs to fill a gap of around Rp 85 trillion (US$9.5 billion) in 2004, consisting of roughly Rp 20 trillion in budget deficit (under a 1 percent of gross domestic product deficit assumption -- highly optimistic, especially in an election year) plus Rp 45 trillion of foreign and Rp 20 trillion of domestic debt payments. Without the IMF program, Paris Club rescheduling, which this year has relieved our budget of Rp 27 trillion of debt service responsibility, will not be there anymore.

A digression: Some analysts suggest that, without the Paris Club, the government has the opportunity for bilateral debt negotiations, dubbed "strategic negotiations". Not true: the Paris Club was formed exactly to prevent this kind of negotiation. This creditor club would crumble if one of its members defects and allows a bilateral solution and since potential costs to individual creditors if the club crumbles are higher than gains from bilateralism, they won't go for it.

What can be done then? Excluding drastic measures detrimental to the economy (e.g., defaulting on foreign debts, financial engineering of domestic debts), at least two things can be done. First, depending on market absorption, the government can issue new bonds.

Furthermore, it can also intensify efforts to realize funds from foreign sources, for instance, through the Consultative Group on Indonesia (CGI) framework. However, although helpful, these initiatives might not be enough to cover the financing gap.

At any rate, the success of both of these initiatives will depend on the government's policy credibility. During the crisis, one of the IMF program's safety net functions was to lend credence to the government's economic management.
Without the IMF, the government needs to establish its own credibility. If it cannot, both initiatives will fall apart: investors will be reluctant to buy government-issued bonds out of fear they might become junk bonds, and funding agencies will not disburse their funds if promised reforms do not push through.

Can our current government live up to this challenge? Four months into the last year of the IMF program, the government has yet to plan an exit strategy. Compare that with Korea and Thailand, who prepared their exit strategies more than a year prior to the end of their programs. With election politicking next year, I am even more pessimistic.

Hence, as it stands, it appears we still need this safety net and this is, indeed, a sad fact. Keeping the net will, in a way, hurt our pride as a nation. But the alternative might hurt even more. I'd rather swallow my pride this time around than risk another economic crisis especially since the widespread suffering it would create would disproportionately be borne, not by those deciding officials, but by the poor and vulnerable.