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Indonesia's cycle of subservience to the
IMF
By Bill Guerin
Despite
growing "anti-IMF" sentiment among some Indonesian
politicians, last month's draft budget for 2003 was
crafted to appease the International Monetary Fund and
ensure that the country continues to receive the
remaining tranches of a long-drawn-out US$5 billion
rescue program. This is the seventh letter of intent
(LoI) between the IMF and the Indonesian government.
However, the House of Representatives wants the
government to revise some budget figures to bring them
more in line with current global economic developments
and the real needs of the economy. This follows concern
from businessmen who complain that the target proposed
earlier by the government would harm their businesses
because of current economic difficulties and shrinking
export markets overseas.
The budget predicts
that export growth will jump from 3 percent this year to
7 percent in 2003, and the Bank Indonesia promissory
note (SBI) rate is predicted to fall to 13 percent next
year from more than 18 percent last year.
Investing in SBIs, the main pastime for many
banks during the past couple of years due to its high
interest rates, will become less attractive. Such
reductions in the central bank benchmark rate will drive
bank lending rates lower and boost lending activity as
loans became cheaper, which in turn will stimulate
economic growth.
The rupiah is expected to trade
at 8,700 to the US dollar. Crude oil is expected to
fetch $20.50 a barrel. Increasing political tension in
the Middle East, triggered by threats from the US to
launch an attack on Iraq, have boosted international oil
prices to about $29 per barrel.
The fuel-subsidy
cuts are expected to lead to a 20-25 percent hike in
fuel prices. This alone may contribute some 2 percent to
overall inflation.
A projected hefty 39 percent
further reduction of subsidies on oil-based fuel and
electricity, married to a 20 percent increase in tax
revenues, will bring down the public-debt level. Total
public- and private-sector debt is now at a staggering
$210 billion. Targets for gross domestic product (GDP)
growth of 5 percent and inflation easing off to 8
percent seem a tad cozy given current business
sentiment.
Extra revenue will come from slapping
value-added tax (VAT) on electricity and highway toll
charges, and from higher property taxes, the usual
suspects as it were. The subsidy cuts will further
restrain the weak spending power of the average
consumer. The economy continues to be driven mainly by
domestic demand, which contributes about 75 percent of
GDP, but not from the pockets of the low-income groups,
who can scarcely afford anything other than
sembako, the nine basic goods. The head of the
Indonesian National Front for Labor Struggle, Dita Indah
Sari, has said the government was placing more priority
on pleasing the IMF by withdrawing fuel subsidies than
on attending to the people's needs.
Recent
increases in the minimum wage levels, if implemented,
may have some effect inasmuch as the workers can buy
more cigarettes to boost the rosy prospects of cigarette
makers Gudang Garam and Sampoerna.
Most of the
World Bank's financial assistance, an average of some
$310 million per annum for the past three years, has
been used to finance social services and basic
infrastructure for the poor. Outgoing World Bank country
director Mark Baird pointed out last month that though
"only" 13 percent of Indonesians were living below the
poverty line, large swaths of the population were living
on less than $2 a day and vulnerable to sudden
misfortunes, such as sickness in the family.
Wardah Hafid, coordinator of the Urban Poor
Consortium (UPC), defines poverty more starkly from two
perspectives: economic and social. She says people are
regarded as poor if the earnings of a family of three to
five members have less than Rp35,000 ($4) per week or
Rp150,000 ($17) per month. Socially, the poor are
families that work in the informal sector, such as
pedicab drivers, street vendors or casual laborers.
The moneyed classes, on the other hand, continue
to spend as if there were no tomorrow. Credit cards are
being touted all over the place, every week there are
major property exhibitions and Astra International, the
largest local car (and motorcycle) maker, reports strong
sales.
Baird praised the government for sticking
with the IMF program through "constant setbacks and
challenges to the discipline of the programs" and put
his pennyworth in for the patient, prescribing five
immediate steps to get back on the road to health. These
included, not surprisingly, the usual pat remedies of
improvement in tax and customs administration and a
strong drive to sell Indonesia Bank Restructuring Agency
(IBRA) assets.
Indonesia joined the IMF in 1967
but it was not until the economic crisis struck in 1997
that the government decided to ask for Fund assistance.
IMF reviews are always accompanied by in-depth scrutiny
of the government's financial position but never result
in a magic medicine for the debilitating sickness
brought about by the national debt.
The
country's total foreign debts in 2002 amounted to $130
billion or Rp1.17 quadrillion and domestic debts reached
Rp657 trillion.
Demands for flexibility on the
part of the IMF make sense given that the alternative is
that Indonesia, without such external assistance, could
be forced, for the first time ever, to default on
sovereign debt and bring about a huge loss of
confidence.
But in June National Planning
Minister Kwik Kian Gie launched a bitter tirade against
the IMF, calling on the government not to extend the
relationship when the current country program expires in
November.
The outspoken minister's attack led to
much public debate and was billed in Jakarta as
reflecting a split within the cabinet. However, though
several legislators spoke in favor of booting out the
IMF at last month's annual session of the People's
Consultative Assembly (MPR), in the end the issue went
nowhere. There was recognition that the cabinet's policy
makers have found it tough to generate rapid economic
growth under the prevailing circumstances, but the
general gist of the debate was that somehow the IMF was
to blame, not the government.
Kwik was left
fuming in the wings threatening to support a
class-action suit filed by lawyers against the IMF for
recommending policies to the Indonesian government that
had caused the country's economy to deteriorate further.
Coordinating Minister of Economics Dorojatun Kuntjoro
Jakti (Kwik's boss) and Finance Minister Budiono were
much more pragmatic, and said little, at least in
public, that could be taken as a weakening of the
president's support for a continuing IMF role in the
country.
Commission B wants the government to
improve its bargaining position in dealing with donor
agencies and would draft a new economic policy law to
reflect this.
The target for the taxmen this
year is Rp219.6 trillion and for 2003 a whopping Rp260.8
trillion (US$29.2 billion), or 13.3 percent of
GDP.
Given the notoriously inefficient and
corrupt nature of the tax system, the authorities are
likely to go after the easiest catches, such as big
corporations, foreign companies and the existing
individual taxpayers. The normal practice of demanding
official and unofficial (illegal) payments to meet their
tax-collection targets will further depress business
sentiment at a time when many Taiwanese and South
Koreans are making determined efforts to move their
business out of Indonesia.
Both the Megawati
Sukarnoputri administration and the previous one talked
up their privatization programs as if they were going to
be implemented in a real business arena, not one
hindered at every turn by those whose vested interests
in retaining their state-owned-enterprise "cash cows"
and by the easy call that the family jewels should not
be sold off to greedy foreigners. Now that politicking
has begun in earnest for the 2004 election, these
mischief makers may win the day.
Privatization
targets will also be difficult to achieve given the
stalemate over some of the sales, including the
privatization of PT Semen Gresik and its subsidiaries.
The director general for state owned enterprises
(BUMN) in a performance report identified a mere 11 out
of 161 BUMN as being commercially sustainable, while 145
of the state-owned firms are running at a loss.
On the other hand, successful privatization of
some state-owned monoliths would be expected to drive
them into healthy profits and efficiency, rather than
the cash cows of officials, politicians and rent
seekers. Waiting for their opportunity, these
sophisticated white-collar robbers are ready to leap out
and cry foul, claiming that selling off public companies
is "unnationalistic" and "unpatriotic".
IBRA's
recent success in asset auctions, though generating more
than Rp23.5 trillion, lost some of its gloss when it was
disclosed that the very people who owned them in the
first place probably bought most of these assets back -
at an average 25 cents on the dollar.
And yet
the budget projects a more than doubled level of income
from asset sales to the private sector for the 2003
fiscal year, an unlikely scenario after State Minister
of State Owned Enterprises Laksamana Sukardi's own
admission that in the first semester of this year's
target of Rp6.5 trillion, they only managed to bag Rp2
trillion.
The Investment Coordinating Board
(BKPM) said two weeks ago that foreign direct investment
(FDI) in Indonesia during the first half of this year
dropped by 42 percent to $2.5 billion compared with the
same period last year, while domestic investment plunged
by 70 percent to Rp11 trillion.
Without new
investment Indonesia will forgo export growth and with
annual external debt servicing forecast to rise above $5
billion from 2005 on, the economy can never produce
enough revenue to afford that huge burden.
Another cause for concern is the amount of funds
allocated to the development program. Some Rp54.5
trillion was proposed, less than the target for this
year, and an amount insufficient to even start to
generate economic activity and growth and create more
jobs.
Targeted spending for development for 2003
accounts for only 2.8 percent of GDP, compared with 3.1
percent this year.
Getting the asset sales
program back on track will be a lot more difficult than
just sitting back waiting for windfalls like the sales
of Telkom and Indosat shares on the secondary market -
which were simply passive privatization.
There
is little demand for shares in Indonesian companies.
Capital Market Supervisory Agency chairman Herwidayatmo
says there are fewer than 50,000 domestic individual
stock investors, compared with about 2 million in the
heady days before the market collapsed in 1998.
Though a "belt tightening" budget is badly
needed to prune the budget deficit and improve fiscal
sustainability, continued depressed growth rates will
mean such a standard prescription for economic recovery
will badly affect exports and investment levels.
It will also make it difficult for the
government to conjure up some interest in international
financing to fund projects, create jobs and get growth
rates up.
The central government actually gets
in more money than it pays out and in the 2002 budget
this surplus is almost $5.3 billion. But the reality is
a deficit equivalent to 2.5 percent of GDP. Internal
interest payments of Rp59.6 trillion ($6.5 billion) and
external interest payments of $3 billion turn the
surplus into a deficit of $4.2 billion.
This is
the crux of what the IMF-Indonesia relationship is all
about. The interest on foreign and domestic debt is a
stranglehold that forces Indonesia to seek new loans in
a vicious circle that traps the government within a
master-servant relationship with the IMF and other
international donors.
This staggering debt and
lack of room to maneuver suggest that an appropriate
prognosis of the suffering ahead is that there will be
still be much more pain before gain. Though the business
community and the economy as a whole will feel this
pain, the poor and impoverished will bear the brunt.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
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