Indonesia | Economics

Wednesday, August 25, 2004

On the IMF-initiated debt rescheduling

Something is odd about in President Megawati's report on economy in her State of the Union address last week. Is bad politics colouring the President's most important annual speech?

(26 August 2004, Jakarta Post) For the most part, there was nothing out of the ordinary in last week's presidential address. Ditto the section on the economy -- that is, if we exclude the section's "prelude" on the International Monetary Fund (IMF).

President Megawati Soekarnoputri began her report on the economy with a commentary on the recovery effort and the role of international institutions in them. She then alluded to the IMF's "honest and open admission of past mistakes" before expressing her hope for remedial actions by the IMF. The least the IMF could do, she said, would be to initiate debt rescheduling initiatives to ease the government's fiscal burden.

I find this part of the address puzzling. That the President should begin with the IMF was natural a year after the end of the program. What puzzles me is the latter part: Her hope for an IMF-initiated sovereign debt rescheduling.

That was hope misplaced. The IMF is an international institution with a limited mandate that includes surveillance, technical assistance, and balance-of-payments support to countries in crisis. The IMF cannot go beyond its mandate -- and the President was asking the IMF to do just that.

The impression the IMF can initiate rescheduling might have been the result of a misinterpretation of the Paris Club's conditionality principle. With this principle, debtor countries must participate in an IMF program, signaling a need for debt relief, to qualify for special debt treatments. Or, in other words, participation in an IMF program is "the key" to opening negotiations regarding debt rescheduling with the Paris Club.

But the Paris Club neither lends nor gives this key to the IMF: Only a debtor country's decision to participate in an IMF program, and not the IMF, can open doors to negotiations. The only way the IMF can be somewhat involved in this is if a debtor country decides to be in the IMF program -- which is why, after the speech, economist Dradjad Wibowo accused the Megawati administration of wanting to invite the IMF back.

Personally, I don't believe this was the speech's intention. That is why its mention of an IMF-initiated debt rescheduling was odd. What is even puzzling is that, without a doubt, the administration's economic team must have known about this, and would not, with clear conscience, slipped it in the economic report of the president's most important annual speech. Reading the immediate responses of government officials in the media, it seemed that even they were taken by surprise.

In the (slightly modified) words of Sherlock Holmes, when all other contingencies fail, then whatever remains must be the explanation. In this case, the explanation is Politics. My guess is that, somehow, a member of the speechwriting team must have thought taking an anti-IMF stance would boost the incumbent's popularity in an election year.

If my guess is true, then it was a bad strategy. Most people have forgotten about the IMF; meanwhile, the administration's economic team is beginning to build their credibility as competent managers of the economy. Though the economy is not exactly on the up-and-up, maintained economic stability through increasing US interest rates and high oil prices is something the economic team can be proud of.

But instead, the spin-master decided to pick an issue whose relevance is, at best, marginal. Worse still, this decision projected an image not of a strong administration able to resist foreign pressures and be independent (as was probably intended), but of one whose economic team is unable to handle its own (debt) problems without outside help. Then, there's the issue of its logical implication: Is the Megawati administration really inviting the IMF back?

This is unfortunate. In many ways, the economic team has, gradually, gained credibility as able and independent managers after the end of the IMF program. There was this image of the coordinating minister for economic affairs, speaking at the Consultative Group on Indonesia (CGI) meeting on December 2003, arguing for a new approach that maximized Indonesian ownership of the CGI processes.

For what it's worth, there is no point in reviving anti-IMF sentiments. Yes, the IMF gave some bad recommendations -- but, as the President herself admitted in the speech, the government was equally responsible for accepting its recommendations. Let us end this blame game; there are better ways to spend our energy, political or otherwise, than playing this game.

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