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In Indonesia, is success the enemy?

Source
International Herald Tribune - March 27, 2000

Michael Richardson, Jakarta – After sidelining the military and consolidating democracy in Indonesia, a country long used to authoritarian rule, the government of President Abdurrahman Wahid is under increasing pressure to speed economic reform efforts or risk losing the fragile gains in stability it has achieved.

Just over five months after taking office, the government can point to some promising signs of recovery from the country's worst recession in more than 30 years. But foreign officials fear that renewed growth may reduce the incentive to push ahead with painful changes in Indonesia's financial, legal and tax systems, where local vested interests, corruption and inefficiency continue to deter urgently needed investment.

"The government may feel fortunate that growth is returning to Indonesia," John Dodsworth, senior representative of the International Monetary Fund in Jakarta, said at a meeting of the US Chamber of Commerce last week.

"But without real structural change, the consumption-led recovery will dissipate and Indonesia will face a long period of stagnation, as have other countries that refused to tackle financial-system and corporate problems."

On a recent visit to Indonesia, Stanley Roth, the US assistant secretary of state for East Asia and the Pacific, said the greatest challenge facing the world's fourth most populous nation was to revive its economy. He said political stability would not take hold until there was a renewal of growth based on a sound structure.

There is unease, too, among business leaders and foreign investors at reports of continuing divisions over policy in Mr. Wahid's multiparty coalition government and among his economic advisers. The president, who is evidently impatient about the pace of reform, recently said he would set up a third team of economic experts to "support" his economic ministers.

"The plan is a ridiculous idea," said Hadi Soesastro, an economist who serves as executive director of Indonesia's Center for Strategic and International Studies. "The president may have performed well and have the support of the people, but policy implementation is another thing."

Indonesia's next loan of $400 million from the IMF could be at risk if it fails to implement key changes soon. The disbursement is due April 4. The government signed an agreement with the IMF in January for a new $5 billion loan over the next three years to help bridge a big budget deficit, support the Indonesian currency, the rupiah, and convince investors that it is serious about reform. The agreement set targets for restructuring the banking and corporate sectors, reducing corruption and cleaning up the court system.

"The next two or three weeks are critical in terms of program implementation and constitute a major test for the government," Mr. Dodsworth said. "Good implementation of the program will have its rewards in terms of market support, but conversely, slippages will be damaging for market sentiment."

A delay or suspension of IMF support could affect a proposal by Indonesia that it be allowed to delay repayment of about $2.2 billion of foreign debt that matures this year. The request will be considered April 12 by the so-called Paris Club of countries that lend money to Indonesia. The club normally takes action on debt rescheduling only after the government concerned has signed up for an IMF or World Bank reform program and is in compliance with it.

Still, Jakarta's success Friday in selling a nearly 40 percent stake, valued at $506 million, in the automaker PT Astra International to a Singapore-led group of investors is seen as a promising sign of its ability to accelerate asset sales and push deals through in the face of local opposition.

Economic growth is officially forecast to reach nearly 4 percent this year after marking time in 1999. The economy shrank about 14 percent in 1998 as the Asian financial crisis, violence and political instability decimated heavily indebted banks and companies, throwing millions of people out of work.

Some nongovernment economists, including those at the IMF, say growth in 2000 may reach its average pre-crisis level of between 5 percent and 7 percent in inflation-adjusted terms.

Markets, shops and department stores in Jakarta and other large cities are crowded with buyers once more. Car sales in January, the latest reporting period, were four times those of the same month last year, and there is a three-month wait for Indonesia's most popular locally-made family vehicle, the Kijang. Property sales are rising, and ACNielsen Media International reported recently that advertising sales in Indonesia were up 40 percent in 1999.

Interest rates have fallen sharply, with the benchmark one-month rate now below 11 percent, down from about 70 percent at the height of the crisis.

But Mr. Dodsworth of the IMF said the government should not be misled by short-term prospects. "At this stage, this is a consumption-led boom from a low base," he said. "The Indonesian economy was sick before 1997 even though it had respectable growth, and it is sick in 2000 even though growth may return."

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