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 involvement thus far
Indonesia's intensive relationship with the IMF began when Indonesia accepted the IMF's offer to implement a programme of economic reform after the Asian economic crisis of 1997 (see DTE IFI Factsheet No.2). The IMF's involvement with Indonesia has been through a number of programmes implemented by Indonesia, the main elements of which are outlined in Letters of Intent (LoI). In essence these programmes were conditionalities for the disbursement of IMF loans in accordance with an agreed time schedule. This type of collaboration falls into the IMF's Extended Fund Facility (EFF) category.
The contract with the IMF has already been implemented for three periods as outlined in the table below:
Indonesia-IMF Financial Agreements (per 31 Maret 2003)
|Type||Agreed||Ends||Loan agreed (US$ billion)||Loan disbursed (US$ billion)|
|Stand-by loan||5 November 1997||25 August 1998||10.83||4.76|
|Extended Fund Facility||25 August 1998||4 February 2000||6.99||4.93|
|Extended Fund Facility||4 February 2000||31 December 2003||4.72||2.94 (to March 2003)|
The total sum disbursed of the second stage Extended Fund Facility up to the end of March 2003 was US$ 2.94 billion. After the IMF Executive Council agrees monitoring of the ninth stage, a total of US$ 480 million will be disbursed immediately. It is planned that the IMF will disburse a total of US$ 1.8 billion this year.
In general, not all the loans agreed have been disbursed. This is because the IMF's evaluation has indicated that Indonesia has not managed to fulfil a number of conditions laid out in the LoI, such as levels of inflation and delays in the privatisation agenda.
There has been much debate on the role of the IMF in Indonesia. The IMF's involvement in Indonesia in practice may be summed up by three main points. First, the flow of IMF loans to Indonesia in order to fill the state budget deficit. Second, the improvement of the economy at macro level in order to improve market and investor confidence. Third, IMF support to Indonesia to secure debt-repayment re-scheduling agreement from the Paris Club. No state has yet submitted a debt-repayment rescheduling without the support of the IMF.
However, the IMF's attempts to save Indonesia from economic crisis have failed. It is not only because of the Indonesian government's mismanagement of the crisis that these failures have occurred, rather the main reason is due to the IMF's somewhat generic recipe of raising taxes, cutting public expenditure and raising interest rates which have had the effect of extending and deepening the economic crisis in Indonesia.
Other studies have also documented the negative impact of IMF policies. First, IMF pressure to increase exports by a policy of deregulation and liberalisation has resulted in states with a weak manufacturing economic base exploiting natural resources such as mining and forestry. Second, budget-tightening policies have resulted in the cutting of subsidies in the food, education and health sectors. This in turn has increased social costs and has brought trauma to the poorest groups, as has occurred in Zimbabwe, Ghana, Jamaica, Latin America. The involvement of the IMF also has an impact on a state's sovereignty. The IMF makes a lot of interventions in the processes of economic and political decision-making, placing an emphasis on the need for a state to prioritize economic stability in order to gain market confidence.
Behind all this, one thing must be borne in mind when looking at IMF involvement. The economic crisis in Indonesia cannot only be seen as a contagious effect from the economic crisis that began in Thailand. Liberalisation policies in the financial sector that have been developed and pushed by the IMF and the World Bank (and the industrial countries that support them) on the Indonesian Government resulted in the weakening of the Indonesian economy and public and private sector debts that got out of hand. So the implementation of IMF (and World Bank) policies has in fact only taken Indonesia back to the same conditions that precipitated the financial crisis in the first place.
December 2003 marks the end of the Indonesian Government's contract with the IMF. Vice President Hamzah Haz made an official statement at the beginning of May 2003 that the government had made a decision not to extend the IMF programme after December 2003. This decision was made on the basis of MPR decision No. VI/2002, whereby if the government decides to extend the programme, this must be done with the agreement of the MPR. The MPR decision reflects its request not to continue collaboration with the IMF which is tied to programmes in the form of LoIs, because this form of collaboration reduces Indonesia's freedom to make its own decisions.
With the end of the Extension Fund Facility in December 2003, the IMF's Senior Advisor for Asia Pacific, Daniel Citrin, has stated that the Indonesian government's obligation to the IMF comes to a total of US$ 9.7 billion, which may be paid in stages up to 2010.
Responding to Indonesia's wish to end its involvement with the IMF, Daniel Citrin offered Indonesia three choices. The first, to draw up a new contract using the same system as before, namely in the form of Stand-by loans. Second, a Precautionary Stand-by loan and third, Post Programme Monitoring (PPM).
The first and second choices oblige Indonesia to make a commitment in the form of an LoI. The third choice is not based on an LoI. The difference between the first and second scheme lies in the length of the contract and the length of repayment time. In the first choice, the length of contract and the time for repayment is longer than under the Precautionary Stand-by loan, which is similar to an emergency loan which may only be used if necessary. The term 'precautionary' is used in order to demonstrate that the Government must implement healthy economic policies as a first line of defence. Under the third choice, Indonesia ends its contract with a monitoring programme carried out four times a year, without the disbursement of any loans.
Outside of the choices put forward by the IMF, of course there is a fourth choice, that is to pay back the debt directly without monitoring, thereby putting an end to economic agreements between the two sides.
The first two choices offered by the IMF in principle give Indonesia access to an opportunity for a debt-rescheduling from the Paris Club. Each year Indonesia receives debt-rescheduling from the Paris Club to the sum of US$ 3 billion.
The debate over the choices available to Indonesia after the end of its current contract with the IMF is continuing particularly amongst economists and the Indonesian government. However the decision to agree to one of the choices offered by the IMF must be made in July 2003, bearing in mind that the government must come up with a draft budget to be presented to the National Assembly (DPR) in August. Because the government has not yet shown the courage to make a transparent decision on how to leave the IMF, the National Assembly has given the government an ultimatum to make the decision by 18 June 2003.
What is the Government doing?
Although there has yet to be an official decision from the government, Economics Minister, Boediono, has indicated that the government is not prepared to take the decision to pay directly without monitoring. He said that Indonesia would miss out on the opportunity to re-schedule debt to the tune of US$ 3 billion for 2004, as has already been agreed by the Paris Club. The government has formed two teams in order to take a decision. The two teams are:
The IMF's Position
Daniel Citrin is of the opinion that Indonesia can continue without financial support from the IMF and the Paris Club as long as the government is able to maintain economic stability. Stable financial reserves, increased market confidence, reduction in inflation, stable currency exchange rates and low interest rates, are indicators that the Indonesian government is capable of overcoming fiscal problems that have thus far been the focus of the IMF's economic reform programmes.
However, Citrin has said in private that the Indonesian government should not rush to make a decision due to the general uncertainty of global economic conditions. Citrin added that he was not in a position to predict the reaction of the market to these choices, though it is likely that the market would prefer the first choice. The choice to continue with the IMF is most likely to raise market confidence, because there is little conviction in the market of the Indonesian government's commitment to implement economic reform. The IMF still hopes that Indonesia will continue its collaboration by continuing its programme of economic reform, and is against Indonesia ending IMF involvement without monitoring.
Debating the Choices
Kwik Kian Gie, the Head of the National Development Board (Bappenas - Badan Perencanaan Pembangunan Nasional), has stated his hope that the government will decide to pay all of its debt directly to the IMF (without monitoring) after the Extended Fund Facility programme ends, because payment in stages will increase the burden of interest and have a negative impact on the state budget. Payment of debt in stages will also mean that Indonesia will still be under IMF control. Moreover, Kwik has stated that the market will react positively upon seeing Indonesia's ability to pay its debt.
As with Kwik, the Executive Secretary of the International NGO Forum on Indonesian Development (Infid), Binny Buchori, has stated that PPM is nothing more than a 'polite' way not to withdraw immediately from IMF dependence when the contract ends. She said that the three choices being discussed by the government indicate the government's reluctance to end immediately its relationship with the IMF.
The third choice, to end Indonesia's relationship with the IMF by monitoring, is thought to receive the most support from cabinet ministers, economic experts and the private sector. Aside from being perceived as not violating the TAP MPR, it also doesn't threaten financial reserves. Under PPM, Indonesia may pay its debt to the IMF in stages, and the IMF can no longer be involved in drafting economic programmes because there is no LoI. At the same time, market credibility is protected.
The debate over this choice stems from two important consequences that must be taken into consideration: the debt repayment obligation and market confidence in the Indonesian government's commitment to implement economic reform.
One indicator often used to measure Indonesia's ability to pay its debt is financial reserves. Indonesia's financial reserves at this stage are around US$ 33 billion, a level which is considered safe for direct repayment to the IMF, and which does not endanger imports for the next six months. However, this debate is not only concerned with determining sufficient financial reserves, but also with political and economic stability which will guarantee that financial reserves remain safe. The debate over the level of market confidence as Indonesia ends its contract with the IMF is not so much concerned with the IMF's role in increasing confidence in Indonesia as with political realities in Indonesia, such as the military operation in Aceh and the 2004 General Election.
To date, Indonesia's public debt – debt guaranteed by the public via the state even though the debt wasn't entered into by the state – amounts to a total of US$ 131.4 billion, more than half Indonesia's GDP.
in US$ billion
|% of the GDP||
Per capita debt
in US$ billion
Is there an Alternative?
Aside from raising more domestic revenue, a number of people have suggested the possibility of obtaining bilateral loans and assistance from the World Bank, the Asian Development Bank and the Japanese Government. The Japanese Economic team has suggested that the Indonesian government maximise the CGI's role in seeking alternative sources for loans.
During the CGI's January 2003 session, the Japanese Government stated it was committed to supporting the 2004 state budget by making loans immediately after Indonesia leaves the IMF. It also said that it was prepared to bring Japanese investors to Indonesia under certain conditions, including a commitment by the Indonesian government to implement reforms in taxation, government bureaucracy and labour.
The CGI, via Andrew Steer, World Bank Representative to Indonesia, fully supports Indonesia after the end of the IMF programme. Indonesia will be given access to loans of significant sums through the IDA (International Development Association) (See also IFI Factsheet No.1). These loans carry no interest for a period of 40 years. The World Bank itself (See DTE IFI Update no. 33, July 2003) has already stated its commitment to give assistance post IMF.
It would appear that Indonesia need not worry about alternative sources of revenue post IMF, given the offers that have been coming in from bilateral as well as multilateral donors. But to return to the main issue, namely that Indonesia wishes to free itself from the political intervention which goes along with IMF loans, and if Indonesia ties itself once again to IDA funds, Japan or increases its loans from the World Bank, will such interventions be reduced? The key to credibility lies in ourselves and cannot be determined by others.
The Jakarta Post 28/04, 29/04, 30/04, 01/05, 02/05, 05/05, 06/05, 08/05, 09/05
Asia Pulse/Antara, 23/04
Bisnis Indonesia 09/05, 13/05
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