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Asia-PacificFebruary 3 2004

Removal of deficit takes priority

When Indonesia graduated from the IMF programme at the end of last year, it brought to an end a traumatic six-year relationship, but since then the country has emerged stronger and more fiscally disciplined.
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For most ordinary Indonesians, mentioning the IMF revives painful memories of the Asian financial crisis, when director Michel Camdessus stood with his arms crossed as a bowed President Suharto signed an agreement listing 50 conditions in return for a bail-out package worth $43bn.

At the time, it was the biggest bail-out in IMF history: a reflection of the depth of Indonesia’s woes. Six years on, the country has now recovered sufficiently to move forward without either the funds or the strictures of the IMF.

The report card is mixed, however. The past three years have seen the economy and exchange rate stabilise and return to growth, the banking sector get back on its feet and the stock market return to pre-crisis levels.

But the government of President Megawati Sukarnoputri has done little to tackle the rampant corruption that pervades all levels of society; investors are still being frightened off by the lack of legal protection; and doubts remain about the political will to make the unpopular decisions that will be necessary if economic prosperity is to be assured.

The problems were starkly illustrated at the beginning of last year, when the government tried to cut the annual fuel subsidy, which costs around $3bn a year. Popular protests forced the government into an embarrassing U-turn, and there has been no further discussion of cutting subsidies.

The IMF will retain a post-programme monitoring role, and the government has published a White Paper outlining its economic programme for the coming years, which places heavy emphasis on maintaining the market-orientated policies of the past few years.

Worries remain about politicians’ discipline and their ability to resist the temptation to spread state largesse around – particularly with general and presidential elections scheduled for this year.

“The markets and investors are still confident with Megawati’s team, especially Finance Minister Budiono,” says Fauzi Ichsan at Standard Chartered Bank. “The only problem is the political pressures. Just like in the Suharto era, you have all these Western-trained technocrats trying to push through reforms, but they are being resisted by strong vested interests.”

The stakes are high – although the economy is growing at between 4%-5%, it is still well short of the 6%-7% that is needed to absorb new members of the labour force.

At the heart of the White Paper is the need for continuing economic stability and increasing employment and investment. However, Mr Budiono has told investors that he is intending to place more emphasis on reducing the budget deficit (which is expected to run at about 1.9% of GDP in 2003) than in stimulating the economy.

The aim is to eliminate the budget deficit by 2006, and the government intends to use the proceeds from privatisation sales, combined with the income from the first sovereign bond since 1996 – budgeted to be in the $400m-$500m range – to achieve this.

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Read more about:  Asia-Pacific , Indonesia