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Down to Earth IFIs Factsheet Series

No 13, June 2001

IFIs in Indonesia

This series of monthly factsheets on International Financial Institutions (IFIs) will include information on the World Bank Group, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), focussing on their involvement in Indonesia.

The IMF's Current Method of Crisis Response: How is it implemented in Indonesia?

The IMF has been criticized for losing sight of its original purpose to facilitate financial recovery and for becoming a player in the political arena instead. The Fund can be satisfied by the implementation of certain policies and directives without concern for the suffering of the people. It has also been accused of sending the wrong signal to risk-taking, short-term profit seeking investors by providing bail-out packages to countries experiencing crisis. The same institution has supported global attempts to promote a free and unregulated market whose global effectiveness to offer better solutions for poverty alleviation and growth sustainability have yet to be proven.

The Fund's New Method

The IMF acknowledges that the 1997 Asia economic crisis would have been less severe had reforms at the Fund been place. In May 2001 the Fund's outgoing First Deputy Managing Director Stanley Fischer outlined the Fund's current method of crisis response. In the future, the Fund will:

Method vs. Practice

How is this method being applied in practice? An example from the Indonesian power sector is described below.

Bail-out for whom?

The Fund is expected to disburse the long-delayed $400 million loan to Indonesia in the near future (see also this month’s Update). This delay and the reasons behind it have been the subject of a long dispute between the Government of Indonesia (GoI) and the IMF and a debacle for the country's economy. In the meantime, under pressure from international lending agencies including the Fund, the state-owned electricity company, PLN, is preparing to pay a $240 million penalty to the Overseas Private Investment Corporation (OPIC), the US government's political risk guarantee agency. PLN has to pay the penalty because it breached Power Purchase Agreements (PPAs) it signed with the US-based energy company, CalEnergy, which bought risk guarantees from OPIC. It is alleged that these PPAs were tainted by corruption and nepotism. By December 31, 2001 Indonesia must also settle other claims totaling $282 million.

PLN has not been able to honor a number of PPAs because it buys power from the companies in US Dollars, as agreed in the PPAs, and sells to the domestic market in Rupiah. The Rupiah has lost significantly in value against the dollar. It was around Rp 2,500 against the dollar prior to the economic crisis and is now around Rp 11,000 to the dollar. PLN has not since raised power prices to catch up with the costs of providing the services, due to the significant weakening of purchasing power in the country.

When these penalties are paid, the actual value of the incoming IMF $400 million disbursement may be much less that expected. The Minister of Energy and Mineral Resources Purnomo Yusgiantoro said that the payment of the OPIC claim would not burden the current budget because it would be pursued through the Paris Club debt settlement scheme. However, it will indeed impact the debt burden in 5 to 6 years when that grace period is over and the loan payments will have to start. Director General for Budgetary Affairs Anshari Ritonga disagreed with Yusgiantoro's statement. He said that the money must come from the State Budget and that Indonesia would then have to seek financial sources to cover it.

The recently demoted Chief Economics Minister Rizal Ramli said in early June 2001 that the decision to pay the claim was made to maintain a good relationship with Washington. Indonesia has no choice but to surrender to U.S. pressure to pay the penalties. The U.S. enjoys major leverage at the Fund and has used the Fund's facilities to save U.S. interests in Indonesia and other troubled economies.

Fiscal Tightening Still Rigid

The IMF has asked Indonesia for a viable plan to address the problems in Indonesia’s budget. The Government of Indonesia (GoI) has responded by translating the budget deficit into public subsidy reductions including the 30% fuel price increase and 20% rise in electricity charges that will soon be put into effect. John Dodsworth, the Fund representative in Indonesia, claimed that these increases should not be seen as a condition, and the question of whether and when to increase fuel prices was a decision for the GoI. The GoI, however, does not see these changes as a choice. Instead, it sees these price hikes as a condition imposed by the Fund to secure a viable budget.

Who is Vulnerable?

Independent Power Producers (IPPs) -- like the US-based CalEnergy or the UK-based PowerGen --have been doing business in Indonesia since the Soeharto era and have never felt their investments were vulnerable even though the Power Purchase Agreements (PPAs) are based on unrealistic market prices. These companies are well aware that the Fund's bail-out solutions to crises will ensure that they will never lose money and that their governments will push the IMF to ensure that their investments are rescued.

The experience with IPPs in Indonesia indicates that the companies would have been financially vulnerable if the Fund had not provided bail-out packages to Indonesia. If the Fund really intends to strengthen its focus on current developments which may leave countries vulnerable to further crises, it should urgently require that the GoI and private sector share more equally the rights and responsibilities arising from Indonesia’s current problems. This would include the re-negotation of PPAs and the debt burden that they have caused as fundamental requirement to reduce Indonesia’s economic and financial vulnerability to future crises.

Will the New Method Be Meaningful to Indonesia?

The Fund increasingly acknowledges that its ‘reform approach’ has impacts on the poor and can affect the long term economic and financial sustainability of borrowing countries. In addition, the Fund has become more willing to deal with poverty issues. Yet, the institution has not been successful in figuring out how to deal with these issues in their operations. Therefore, it is not realistic to expect that the new methods will bring about meaningful differences in the Fund's operation in Indonesia.

However, a new Letter of Intent (LoI) will probably be developed by the Fund once President Wahid's increasingly shaky government is replaced. This is an opportunity for Indonesian and international civil society organizations to demand that the Indonesian Government and the Fund:

  1. make the draft of Letter of Intent public;
  2. identify in detail the positive and negative impacts of the conditionalities;
  3. provide detailed plans to deal with the impacts;
  4. explain how the GoI, private sector, and Fund will share the rights and responsibilities of the proposed reforms.
These four key issues should be made public prior to the finalization of the LoI.

(References: AFX-Asia, May 30, 2001; The Strait Times, June 2, 2001; Indonesia Letter of Intent of Sept 7, 2001; Petromindo, May 15, 16 and 22, 2001; Reuters, May 15, 2001).

This IFI factsheet is published by Down to Earth, the International Campaign for Ecological Justice in Indonesia.

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