Jakarta – The International Monetary Fund (IMF) has warned that instability could occur if the government presses ahead with its plan to increase prices in the energy sector, at a time when economic recovery is still in a fragile state.
IMF Senior Representative in Jakarta Dr. John R. Dodsworth, in an interview with the English language news-weekly magazine KAPITAL, which will be published on Friday, said that IMF did not want to see socio-political instability that could jeopardize economic recovery programs being implemented by the Indonesian government.
Asked if IMF had pressured the government to raise energy prices, Dodsworth said it was actually the government, rather than IMF, which had insisted that subsidies be removed from the budget.
His statement seems to contradict the widely-believed perception that the government was under IMF pressure to raise prices and tariffs. "The way the discussions went was that the IMF was rather on the other side of removing subsidies in the budget too quickly. This needs some years. And we would make the argument that the first thing you need for an economic program to work is social stability.
The feeling of the government was these subsidies were bad, and that it was time to get them out of the budget," he recalled. "I have no doubt in my mind that when discussions started in December, the government was at a higher level than we were about price increases. We said, of course, the government's decision was good economics, but on price increases we don't want to see instability. That would affect the progress that we can make on the program."
On the government's plan to raise echelon I [high ranking civil servants - JB] allowances up to Rp9 million, Dodsworth said: "This was another aspect where we had long discussions with the government. We thought it was good to pay more for the public sector over time, to get rid of corruption and so on. But you can't do it in one year and in particular you can't do it when the recovery is still very fragile."
"What we finally agreed with the government was that, let's look at it again. There is going to be very little impact of it on the macro level, but again we were sensitive to the fact that there may be some social problems from very high increases for a small number of people. You need political stability. If you don't have it, then however good your economic program it's not going to be implemented."
The official also expressed dissatisfaction over the slow pace of the implementation of the Letter of Intent (LoI), due to what he described as "vested interests that do not support structural reforms." He added there was a need to increase the speed of institutional restructuring and that IBRA must be quick to move banking credits back to the market.
"There is always difficulty to know why something did not happen. I think it's because we have ministers who were not ministers before; they are learning, trying to keep control of their bureaucracy. You've got to be very much a leader, otherwise the bureaucracy runs the minister rather than the minister runs the bureaucracy."
"All of these structural reforms go against vested interests. They use any weapon they can to slow the reform. That's not to blame the government for this because the government is working in a difficult environment," he said.
"Cacuk [Sudarijanto, the IBRA chief], for example, is a really energetic guy, a doer, he wants to move forward. But let's face it, he is working in a very difficult environment. He may want to do everything tomorrow, but cannot. He has to use all his time building consensus. There is a tendency to blame the team, but actually we have to understand the overall situation in Indonesia is not so conducive to getting these things done." The IMF official concluded that the government has to work harder to accomplish the provisions of the Letter of Intent (LoI).