By Rizal Ramli, Wall Street Journal

Jan. 15, 2002

The International Monetary Fund’s track record in Indonesia has been less than stellar, to say the least. From the moment the IMF was first called in to help in October 1997 its policy prescriptions have only served to deepen an economic crisis that was already the most serious in Indonesian history. Indeed, its misdiagnoses and policy errors helped create an economic disaster of previously unimaginable proportions.

Now, more than four years later, with another IMF patient, Argentina, melting down on the other side of the globe, it is time to re-examine — and hopefully explode — some of the myths surrounding the Fund and its often-calamitous remedies.

The IMF’s mistakes in Indonesia began upon its arrival and can roughly be divided into three stages. In the first stage, the Fund encouraged a super-tight monetary policy in the third quarter of 1997. This was intended to stem capital flight in the aftermath of the devaluation of the Thai baht. The effect of the policy, however, was far more dramatic: The inter-bank interest rate rocketed from 20% to 300% kicking off a widespread liquidity crisis as banks found it impossible to obtain the short-term credits necessary to cover their immediate obligations.

In November 1997, the IMF demanded the closure of 16 insolvent banks without allowing adequate preparation for such a step. This, predictably, resulted in a general run on Indonesian banks and helped fuel the very capital flight the Fund meant to deter. More than $5 billion poured out of the country putting further pressure on the rupiah, subjecting anyone doing business in Indonesia to the twin blows of soaring interest rates and a sharply devalued currency. The inevitable consequence of these policies was mass bankruptcy in the corporate sector and the loss of millions of jobs. In 1998 the economy contracted by 13%, the worst performance in the nation’s history.

The second stage of policy mistakes began with the Fund’s 1998 advice to tackle the problem of corporate debt by converting much of it into public debt led, not surprisingly, to an explosion in public debt — which, over the past four years, has doubled in size to $150 billion, more than Indonesia’s GDP, plus an addition $65 billion of domestic public sector debt.

Which brings us to the third stage. The IMF continues to put unsustainable pressure on the government budget through its insistence on heavy debt repayments coupled with a tight monetary policy. Servicing such debt is expected to cost the Indonesian government $13 billion (130 trillion rupiah) in fiscal year 2002 alone. That’s more than three times the total public-sector payroll and eight times the education budget.

Furthermore, under IMF guidance Bank Indonesia has pursued an anti-inflation policy of raising the interest rate on the central bank’s short-term money-market instruments known as Sertifikat Bank Indonesians. Yet for every 1% the rate is raised, the government deficit increases by roughly 2.3 trillion rupiah.

Sadly, the growing debt burden and resulting fiscal deficit will almost certainly force the government to raise taxes, electricity rates and fuel prices and to sell off state assets at fire-sale prices. In short, the IMF is forcing Indonesia to accept its misdiagnosis and failed prescriptions, while creating a debt trap from which there is no escape. Nonetheless, four myths continue to circulate concerning the IMF’s role in Indonesia, and are often used to justify unwarranted deference to the institution.

The first of these myths is that the existence of an agreement with the IMF increases investor confidence in Indonesia. Yet the experience of the past four years of IMF supervision, and the signing of numerous letters of intent with the Indonesian government, shows otherwise. Investors have yet to demonstrate a renewed faith in Indonesia and are unlikely to do so until the problems of continued political instability, political and communal violence and the absence of rule of law are resolved. It is these, rather than any agreements with the IMF, which are the key to restoring the confidence of the business community.

The second myth is that accepting loans from the IMF also encourages an inflow of private sector capital from overseas. But in fact the reverse has occurred in Indonesia over the past four years, as foreign commercial banks have systematically reduced their exposure to the country. Again, political instability, violence and the weaknesses of the legal system count for far more than IMF involvement in determining business decisions.

The third myth is that the IMF’s involvement will strengthen the rupiah. By now this can only be regarded as a very bad joke. Since October 1997, every IMF supervision mission to Indonesia has been accompanied by a fall in the value of the rupiah, and on every occasion Bank Indonesia has been forced to intervene to stabilize the currency markets. In general, the relationship between the IMF and the value of the rupiah is asymmetrical. When IMF officials make positive statements about the Indonesian economy the currency does not strengthen; but when they criticize the government the rupiah weakens.

The fourth myth is that the IMF is able to persuade other creditors to restrict lending to countries that refuse to follow IMF policies. My own experience reveals that this is simply not the case. As coordinating minister for the economy under the Wahid administration, I signed loan agreements with the World Bank, the government of Japan and the Asian Development Bank despite our disagreements with the IMF. Other multilateral agencies are well aware that withholding new credits to Indonesia is not in their interests, as it would only result in cash-flow problems that would increase the risk of default. Indeed, they often privately view the IMF as obstinate, inconsistent and guilty of repeatedly moving the goalposts in its demands of borrower governments.

These myths continue to be repeated ad nauseum by the IMF’s domestic supporters in Indonesia in an effort to convince the public that the IMF is the only thing standing between the country and economic anarchy. Yet the evidence from other countries in the region suggests the opposite. Malaysia, for example, endured the Asian financial crisis in 1998 without any IMF intervention whatsoever.

In fact, for some time now IMF credits have been equally unnecessary in Indonesia. As a second tier defense they can only be used if Indonesia runs out of foreign exchange. Yet this is unlikely to happen since the country’s reserves now stand at $28 billion.

In other words, the IMF credits cannot be used, but Indonesia must still pay to service the debt that they create. For example, in fiscal year 2001 Indonesia received only $400 million in new IMF loans, but had to pay $2.3 billion to the IMF — consisting of $1.8 billion in repayment of principal on earlier loans as well as interest payments of $500 million. It is as if a doctor, found guilty of gross malpractice, continues to demand payment of fees and interest on the patient’s debt.

It is now time for a comprehensive evaluation of the costs and benefits of the IMF program in Indonesia. A serious debate about the IMF’s role is urgently needed, both in parliament and among the general public, if we are to avoid repeating the mistakes of the past four years. Let it begin today.

Mr. Ramli was Indonesia’s coordinating minister for the economy under President Abdurrahman Wahid.

Sumber : https://www.wsj.com/articles/SB1011108555310096440

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