Feasible Exit Strategy Needed for IMF Parting

Has the IMF helped or hurt Indonesia? At the end of its five year stint, mixed evaluations raise more questions than answers. Some argue that with economic growth as low as 3 percent per year during the IMF’s presence, and with questionable policy prescriptions such as the closure of 16 banks in 1997, Indonesia should not bother extending its contract. Others look back more positively at the “external pressure” the IMF provided on governments such as Suharto’s in 1997-1998. Ultimately, the problem lies equally, if not more, with successive governments’ lack of commitment to IMF policies as much as the IMF policies themselves. With no unproblematic measure of the IMF’s performance, the current government must establish an economic reform agenda of its own, and show a will to stick by it. – Yaleglobal.

Feasible Exit Strategy Needed for IMF Parting

Ari A. Perdana
Monday, March 10, 2003

The IMF assistance program in Indonesia is entering its final year. Signed in 1998, the contract initially expired last year, but the government decided to extend it for another year. So far, the government is still unsure whether or not to once again extend the contract. Politically, it will not be a popular decision for the government to keep the IMF program, given strong opposition against such an idea.

The opponents of the extension argue that the presence of the IMF has not helped much to bring the country out of the economic crisis. It has even cost the country more. It was indicated by the fact that during five years under the IMF program, the economy has only been growing at 3 percent to 4 percent per year. Structural recovery has been very slow, and foreign investors' confidence has yet to fully recover.

Such argument may be true. Maybe not as well. Nevertheless, we are not in the condition to prove that had the IMF not come to Indonesia, back in 1997, the country's economic performance would have been better than at present. But there is something missing in the logic here. Asking for IMF assistance is one thing, but being committed to the settled agreement is another thing. Many times the IMF delayed the loan disbursement because the government failed to perform some policy actions or failed to achieve the indicative targets.

Hence, it is irrelevant to debate how the economy would perform with or without the IMF. We can only evaluate how serious the government is in undertaking the economic reform. University of Indonesia's economist Chatib Basri once illustrated the situation when Abdurrahman Wahid was the president, and Rizal Ramli was the chief economic minister, the relationship between the government and the IMF was at its lowest point. Many policies outlined in the Letter of Intent (LoI) were not performed, and the IMF delayed its loan disbursement for more than a year. That means, during the period, the role of the IMF in the Indonesian economy was not significant. Still the economic performance was not much different with the present.

The illustration suggests that the presence of the IMF is only a secondary factor for the economic performance. The primary factor is the seriousness of the government. But while the main problem lies on the secondary factor, oddly the secondary factor is the one to blame.

Of course, it is now more productive to discuss whether the government should or should not end its program with the IMF. An obvious answer is yes, it should. Otherwise, that means that we have yet to solve our domestic economic problems. The question is how and when should the IMF assistance be ended.

It is basically not a difficult task to end the IMF assistance. It takes only a political decision. The harder part is to prepare the "exit strategy": The post-IMF economic reform agenda. So far, there is no clear exit strategy being socialized by the government. The one articulated was only some possible relationship between Indonesia and the IMF and foreign donors after the program ends. Not a comprehensive economic reform blueprint.

It is not to say that the IMF is free from any sins. Many of its policy prescriptions have been bad, or at least questionable. Most of the problems arisen since the IMF failed to understand the socio-political situation in Indonesia that have distorted economic theories from the reality. For example, the closure of 16 banks in 1997. A good policy on paper, but because it was taken at a time when the economic crisis started to become a political one, the effect was a serious deterioration of public confidence in the domestic banking sector. As a result, banking sector recovery became more difficult.

However, a devil's advocate -- as some people call it -- it may be, one important role of the IMF for the country is making sure that the government is on track on economic reform. Practically, it is the only institution that could "step on the government's toes", quoting economist Faisal Basri's term, to be committed to the economic reform agenda. In the lack of a strong, credible government and a consolidated civil society in which the check-and-balance mechanism is well-functioning, sometimes external pressure is needed to push for economic reform.

Looking back to the 1997-1998 era, it was the IMF that became powerful instruments to strip the rent-seeking power of Soeharto's oligarchy. Through the LoIs, the monopoly powers of the cronies were reduced, the notorious clove marketing agency (BPPC) was eliminated, the ridiculous national car project was stopped, and the off-budget expenditures were made transparent. At a level, those made Soeharto angry and called for the rejection of the IMF, arguing that the LoIs were too liberal and against the Constitution.

We could stop now and think, what would it be had Soeharto really sent the IMF home at that time? But again, that would be an unproductive discussion. What is relevant now is answering this two following questions. Is there any clear agenda of the post-IMF economic reform? Is there any guarantee that those agendas would be consistently implemented?

If the answer to both questions is yes, then we can easily kiss the IMF assistance goodbye.

Ari A. Perdana works with the Centre for Strategic and International Studies (CSIS), in Jakarta.

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