Analysis-IMF key to Indonesia policy, whoever wins

[Robert Weissman <rob@essential.org>]

It doesn't get much more revealing than this. 

Indonesia presents the case of a country recovering from a 30-year
dictatorship that was warmly embraced by the IMF, the World Bank and
multinational corporations. A mass movement throws the dictator out. If
fraud and shenanigans can be avoided, the people will soon install a
democratically elected government.

The prospective financial minister of that government suggests the mildest
non-orthodox financial measures.

The IMF says no way, and everyone -- including the prospective minister
(who, remember, will come to power based on an election, unlike the IMF's
Indonesian representative) -- agrees the IMF will get its way.

Robert Weissman
Essential Information			|   Internet:	rob@essential.org

ANALYSIS-IMF key to Indonesia policy, whoever wins
By Andrew Marshall
JAKARTA, June 15 (Reuters) - Indonesia's next government has yet to emerge
from the murk of drawn-out vote counting and political horsetrading, but
one
crucial member of its economic policy-making team is already known -- the
IMF.
The International Monetary Fund holds the purse strings for the foreign
money
Indonesia desperately needs. It has already co-ordinated a bail-out package
of more than $45 billion. And it has all the power it needs to block
policies
it disapproves of.
The election front-runner, the Indonesian Democratic Party - Struggle
(PDI-P)
of opposition figurehead Megawati Sukarnoputri, has already spooked markets
by proposing a fixed exchange rate.
But PDI-P chief economic adviser Kwik Kian Gie has said a fixed rate would
only be introduced if the IMF agreed.
Analysts say the chances of this are practically zero.
``If the IMF were to agree to this they would lose all their credibility in
the handling of the Indonesian crisis,'' said the head of treasury at a
foreign bank in Jakarta. ``There is no way that the IMF would allow it.''
Kwik has made clear the PDI-P would not take a stand against the IMF. ``A
fixed rate is not everything for us,'' he told Reuters in an interview in
Singapore. ``The whole package is very important. There is no way we will
break up with the IMF.''
The IMF also plays down the prospect of a confrontation.
``There will be no showdown,'' said Kadhim Al-Eyd, senior representative of
the IMF in Jakarta. ``The PDI-P have said some aspects of the programme may
need to be changed and we agree with that. But everything will be
discussed.
This issue has been blown up out of proportion.''
Kwik argues that temporarily fixing the rupiah at 5,000 to the dollar would
help debt-ridden firms pay off their liabilities and cut the price of
imported inputs, allowing prices of manufactured goods to fall and
consumption to rise. He says when stability returned, the currency could be
floated again.
Another senior PDI-P economic adviser, Laksamana Sukardi, said a fixed rate
would only work under conditions which were currently impossible to meet,
such as large currency reserves.
The argument for a fixed rate commands some support, particularly among
Indonesian economists who say the rupiah's collapse over the last two years
had little to do with fundamentals and may have to be reversed by
artificial
methods.
Analysts agree that a firmer rupiah would make it easier to break
Indonesia's
corporate debt deadlock.
But many remain deeply sceptical about fixing the rate.
``A fixed exchange rate would only cause any remaining capital in Indonesia
to get out,'' the head of treasury said.
``If they are going to try an export-driven recovery they should not be
trying to lift the rupiah. Many of Indonesia's exports have little
value-addition so they are competing purely on price. Exchange controls
would
have an impact on export-driven recovery, which is the direction they ought
to be taking.''
The IMF has consistently stood against any form of capital controls for
Indonesia.
Former president Suharto came under fire last year from the IMF and U.S.
government when he flirted with the idea of a currency board system to halt
the rupiah's slide. The plan was never adopted. When rumours of imminent
capital controls resurfaced later in 1998, the IMF was quick to quash them.
Kwik has acknowledged that Indonesia has no choice but to keep the IMF on
board.
``Why should we have to deal with the IMF? Because if not, we will not have
the funds to restart the economic wheel moving again,'' he wrote in the
Kompas daily this week.
Whatever the merits of a fixed exchange rate, this reliance on the IMF
means
it will never see the light of day.
``Given the country's weak economic position and its dearth of foreign
exchange reserves, defending a fixed exchange rate would provide a serious
policy challenge to the new government,'' Warburg Dillion Read said in a
research report.
``(But) given Indonesia's urgent need for large inflows of foreign capital
for the foreseeable future...we believe the next government is likely to
have
little alternative to pursuing responsible, investor-friendly economic
policies.''