As global stock markets slide and a lack of leadership on international reform colored the annual meetings last week of the International Monetary Fund (IMF) and World Bank annual meetings, analysts predict mixed results for Indonesia, which has long asked international creditors to be more understanding if conditions attached to fresh loans are not met on schedule.
The Consultative Group on Indonesia (CGI), which groups Indonesia's bilateral and multilateral creditors, is set to hold its annual meeting October 28-29 in Yogyakarta.
Vice President Hamzah Haz said early last week that he hoped the CGI would not link its commitment to deliver fresh loans to help meet budget shortfalls and fund development programs with the implementation of programs outlined in the government's agreement with the IMF.
The agreement, or Letter of Intent (LoI), outlines reform programs covering a plethora of issues from legal reform to privatization and good governance.
Haz said the targets could generally not be met because of factors outside the government's power – alluding to resistance in the parliament to the privatization program and vested interests of all sorts set against reform of the judicial, customs and other systems.
The government has reason to hope that the CGI will be more understanding as the IMF waived several conditions under its multi-billion program when it dispersed its last loan in April to give Indonesia more time to carry out reforms.
'Structural' reform, focus on corruption
However, the IMF later indicated that it wants to see more progress from Indonesia on structural reforms before it releases the next loan.
"We are looking to further progress in structural actions scheduled under the program ... and that will also enable the seventh review of the program to proceed," IMF senior representative in Jakarta David Nellor told Reuters.
The government had said it expected the seventh LoI to be signed in September but later said it hoped the letter would be signed before the end of October. Nellor declined to say what reform areas Jakarta needed to improve but Mahendra Siregar, an adviser to Chief Economics Minister Dorodjatun Kuntoro-Djakti, said the IMF was concentrating on corruption issues.
Siregar said the Fund was not yet satisfied with Jakarta's slow pace in forming an anti-corruption commission and resolving the issue of emergency loans extended by the central bank during the economic crisis of the late 1990s under the Bank Indonesia Bank Liquidity (BLBI) scheme.
Although the new anti-corruption law covers the formation of a commission, the government's attempts to crack down on corruption in official circles have been disappointing.
The latest furor comes as President Megawati Sukarnoputri is being pressured to sack Attorney General A.M. Rachman although he failed to include a $500,000 house on his obligatory wealth report and gave an appallingly lame explanation of how he managed to purchase it and a host of other assets on a Rp 6 million ($1,300) per month salary.
Results are hardly more encouraging in the case of the BLBI debacle. The Supreme Audit Board (BPK) in a report commissioned in 2000 found that Rp 138 trillion of the Rp 144.5 trillion ($16 billion) in BLBI funds issued over 1997-99 were channeled through improper procedures and then misused by recipient banks, most of which were owned by cronies and relatives of former president Suharto.
While the IMF has been pushing the issue for some time, it had little to say when the government agreed to take responsibility for the vast majority of the debt through the issuance of special bonds several months ago.
The central bank, meanwhile, has escaped almost spotless from the scandal and Bank Indonesia Governor Syahril Sabirin remains at the helm after the Supreme Court upheld his appeal on corruption charges.
The World Bank has apparently taken a similar focus on corruption and bank chief James Wolfensohn told a news conference in Washington during the bank's annual meeting that recent bank programs covered legal and judicial reform and transparency in Indonesia as a means to curb corruption.
But he also said that statements by the World Bank or international institutions are "a lot less effective than an internal push to deal with the question of corruption". "All we can do is to offer support to the government," he added.
New global environment, new focus
Since civil society protests against the IMF and World Bank emerged with a vengeance in recent years, both institutions have attempted to reform themselves and have increasingly warmed to their "supportive" role.
At the World Bank, several high profile debacles involving multi-billion infrastructure projects in the 1990s that uprooted hundreds of thousands of poor peasants and caused environmental damage helped speed a shift in its focus to health, education, improving government services and combating corruption, not least in Indonesia.
As for the IMF, the perceived failure to pull countries, particularly Brazil and Argentina, from the brink of financial meltdown and reduce global poverty likewise fueled protests and a softening of reform targets outlined in their LoIs with governments.
As the Guardian argued last week, the approach now is to concede that the protesters have a point and to stress that everybody – the IMF, the World Bank, the G7, the protesters, the private sector – is united in a determination to make globalization work for rich and poor.
But for all the "togetherness" and polite deference to their critics, the World Bank and IMF are increasingly attempting to offload the burden of negative fallout from unpopular policies onto recipient governments.
When the World Bank's infrastructure drive turned sour, it left unpopular large-scale construction projects to governments. Its "supporting" role now allows the bank to wash its hands of responsibility for the utilization of its massive cash injections, which are handed to an increasingly large array of government, private and nongovernment bodies.
An internal report produced after the worst of the economic crisis had passed, for example, claimed that as much as 30% of World Bank funds to Indonesia had disappeared.
Why the people of Indonesia should now be forced to pay for the corruption of the crony-capitalist excesses of the former authoritarian regime and the endemic corruption left over is the focus of much impassioned discussion on the role of international institutions in Indonesia.
Now that the IMF prescription for economic reform has been shot down from its pedestal, it is increasingly seeking to accommodate the particular scruples of governments and has modified schedules and targets accordingly.
Under the first revision of its Conditionality Guidelines since 1979 – approved by the IMF Executive Board last week – the IMF will focus on the promotion of national ownership of reform programs, parsimony in the application of program-related conditions, tailoring of programs to members' circumstances, effective coordination with other multilateral institutions and clarity in the specifications of conditions.
Governments will take primary responsibility for policies and will draft as much as possible the LoIs setting out the reform agenda.
Although this may provide some breathing space, it does not mean that governments will be spared the difficult and politically sensitive tasks of continuing fiscal consolidation through the gradual removal of subsidies, privatization and through more vigorous tax collection.
While governments may feel justified in taking greater credit for the perceived success of reform measures, the IMF has also managed to avoid the fallout for unpopular policies and any other negative ramifications in the marketplace should performance fail to live up to expectations.
But the most worrying factor in any economic planning is the fact that creditors to countries like Indonesia are going to have to become a whole lot more "understanding" as the global economy faces tough times ahead.
The third quarter, which ended last Monday with the end of the annual IMF and World Bank meetings, was the worst since the 1987 market collapse for the Standard Poor's 500 index, the benchmark of big US companies' share prices, which fell 17.6% during the period.
In Germany, the EU's biggest economy, the main stock index has plunged 46% this year, reported the International Herald Tribune.
But unlike 1987, when prices rebounded relatively quickly, this time the gloom in financial markets seems to be growing, largely due to the talk of war in Iraq.
The general gloom is also evident in plunging foreign direct investment levels and increasing competition among exporters as consumption in the US stagnates – at a measly 0.3% growth in August.
The scenario does not auger well for countries struggling under a mountain of debt like Indonesia, which owes around $130 billion – only slightly below annual gross domestic product (GDP).
First World subsidies, Third World poverty
First world countries offered few apologies for their massive domestic subsidy programs despite the heavy toll on the developing world at the IMF and World Bank meetings.
Such subsidies not only undercut the export-oriented recovery programs advocated by the international lenders but also clearly reveal first world government's two-faced approach to the "free market", critics say.
"It is hypocrisy to encourage poor countries to open their markets while imposing protectionist measures that cater to powerful special interests," Nicholas Stern, chief economist of the World Bank, told The New York Times. Mr. Stern estimates that the average cow in Europe receives about $2.50 a day in subsidies. In Japan the figure is nearly $7.
By contrast, 75% of the people in sub-Saharan Africa and around 60% of Indonesians live on less than $2 a day.
World Bank president James Wolfensohn accused wealthy countries of "squandering" $1 billion a day on farm subsidies. Oxfam estimates the American government spends three times as much on cotton subsidies as it does on foreign aid for all of Africa.
But while comparisons of subsidies and aid highlight the injustice they cannot reflect the real and hypothetical losses to commodity producers in the third world.
Brazil, for example, claims it lost $640 million last year as a result of American cotton subsidies that lead to a downward spiral in cotton prices and filed a legal complaint on the case at the World Trade Organization (WTO) on Friday two weeks ago.
Such challenges to protectionist policies are not new but current uneasiness over the global economic outlook makes them increasingly "dangerous' to world markets and the dominant power structure.
Bandaid solutions
In answer to critics in Indonesia, international creditors offered a couple of Bandaid solutions last week.
Despite legal uncertainty and a desire to see greater reform, the World Bank has said that it plans to boost investment through its investment arm, the International Finance Corporation (IFC).
Newly appointed IFC country manager for Indonesia G. A. Vegarra said investment was down to just $21 million in fiscal year 2002 compared to $400-500 million in a normal fiscal year.
Vegarra said the IFC had devoted much time and effort to legal wranglings this year – primarily over its stake in the Manulife insurance company, which was declared bankrupt in a politically charged and messy case with the previous owners.
He said the IFC would focus on the financial sector, agribusiness, infrastructure, small and medium-sized enterprises (SMEs), and extractive industries like mining, and oil and gas, reported The Jakarta Post.
The IFC is also set to convene a second private sector forum on October 21 aimed at enhancing dialogue between the private sector and the government as part of its preparations for the CGI meeting.
The IFC portfolio in Indonesia includes 35 companies and the IFC has invested $2.2 billion in Indonesia since 1956, making the country its sixth largest recipient.
Meanwhile, the US and Indonesia have agreed on the rescheduling of $485.5 million in principal and interest payments as the government struggles to keep the budget deficit at 2.5% of GDP this year.
The US Embassy said in a statement that the agreement provides for lower debt service payments for Indonesia through the end of 2003 and implements Indonesia's 2002 agreement with the Paris Club with respect to US loans.
Official development assistance (ODA) loans represent some 37% of the loans and include an interest rate substantially below market levels over 20 years with a 10-year grace period.
Non-ODA loans, primarily commercial credits, are being rescheduled over 18 years with a five-year grace period, the statement said. More substantial sums will likely be discussed when a team of senior ministers arrives in the US next month for trade and energy talks in a bid to drum up investment.
Foreign Minister Hassan Wirajuda said the delegation would include Chief Economics Minister Dorodjatun Kuntjoro-Jakti, Trade and Industry Minister Rini Suwandi and Mines and Energy Minister Purnomo Yusgiantoro, reported Reuters.
'Goodbye IMF'
The agenda will also most likely include a review of anti-American sentiment in the world's largest Muslim country.
Around 95% of Indonesia's 220 million people are at least nominally Muslim and the government has used this fact to its advantage since the global "war" on terrorism was launched following the September 11 attacks last year.
Empathy among the population for fellow Muslims victimized by the US in Afghanistan and Palestine has combined with enough popular hostility to the IMF to provide cunning politicians with a wealth of new material in their attempts to win the hearts and minds of voters.
Speaker of the People's Consultative Assembly (MPR), Amien Rais, was in Sulawesi Thursday to appoint new regional leaders for the Islamic National Mandate Party (PAN) he chairs. He declared that the MPR wanted the IMF out of Indonesia in late 2003.
"We will say goodbye to the IMF. Please go back to America quickly. We don't need you because you can do nothing," he said, adding that the Indonesian economy was getting worse. "There is no need to praise America. We will say goodbye to the IMF," he said.
Like a true politician, Rais conveniently forgot to mention that the government is already aiming to go it alone without the IMF loan program at the end of 2003.
Many elements want the IMF out earlier, including members of the government with little interest in winning over voters, such as chairman of the National Development Planning Agency (Bappenas) Kwik Kian Gie.
But the government's line has always been that the country needs to maintain the support of the IMF and the World Bank and the system they represent in order to win back lost confidence in the economy – a view reiterated time and again by the institutions themselves.
But as "confidence" on a global scale takes a battering, much greater "understanding" of the exigencies of the Indonesian political and economic situation will be needed if the IMF and World Bank are to avoid a massive backlash from the millions who see them as an integral part of the cause of injustice and poverty.