Indonesia: Compensation from the IMF?

2004

Ross H McLeod

In her recent address to the nation, President Megawati somewhat vaguely suggested that the IMF might reschedule the repayment of loans it has made to Indonesia since the beginning of the 1997-98 crisis, or perhaps even forgive some of this debt. She justified her position by referring to erroneous advice given by the IMF during the crisis-mistakes it itself concedes.

Debt forgiveness seems out of the question. The IMF gives advice to countries that face a crisis, but it is the responsibility of the government in question either to accept or reject that advice. Rescheduling might be conceivable, but this would involve no financial penalty to the IMF, and would achieve nothing that could not be achieved by issuing more government bonds to finance additional spending. Thus, the president's suggestion seems not to have been seriously intended, and is best interpreted as populist posturing intended to boost her chances in the September presidential election race, in which she is running far behind her opponent.

In some small way, Megawati seems to be following the example of her father, who attempted to save his faltering regime by trying to shift the blame for Indonesia's problems of the 1960s to the international community. Certainly there were shortcomings in the IMF's advice early in the crisis, but not all of it was bad, and the costs incurred by the government were mainly the result of poor policy implementation by the governments of the day.

Most obviously, the IMF advised-and the government agreed to implement-careful control of growth of the money supply, but the central bank repeatedly failed to comply. It injected a huge volume of funds into the tottering banking system, without any careful oversight of the use of these funds. Several banks simply loaned them to affiliated companies, which then used them to speculate against the currency. It was this appalling lapse in the implementation of monetary policy that caused prices to rise and the rupiah to depreciate so drastically, resulting in financial chaos.

Moreover, the weakness and endemic corruption of the legal system permitted parties that borrowed heavily from the banking system to walk away from their debts, leaving the government to pick up the tab-estimated at around $US50 billion. It is, of course, the responsibility of the government, not the IMF, to provide a properly working legal system, which is crucial to the functioning of any modern economy. But none of the three presidents since Soeharto, Megawati included, has made any serious attempt to reform the legal system.

Current economic problems largely reflect Megawati's own unwillingness to take tough policy decisions. On the budgetary front, the prime example is the government's failure to raise domestic prices of petroleum products to anything near world prices. This means that Indonesia's fabulous oil reserve wealth is being rapidly frittered away by wasteful domestic consumption, encouraged by the government. Likewise in the field of forestry, the government is allowing Indonesia's forests to be chopped down to the benefit of private interests without any real attempt to generate a reasonable flow of royalty revenue, which would be of considerable benefit to the general public. In short, the government has effectively abdicated its responsibility to manage Indonesia's natural resources properly.

The international community might have rather more sympathy for the call to lighten Indonesia's foreign debt burden if the government could be seen to be doing all it could itself to maximise its revenues and minimise waste.

WATCHPOINT: Will the incoming government deal with the shortcomings of current policies rather than blaming others and postponing tough decisions that need to be taken?

 

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