On 21 January 2003, the Indonesian government, under pressure from its legislators, declared that it wanted to break free of its commitments to the IMF. Chief Economics Minister Dorodjatun Kuntjoro-Jakti told an annual meeting of donors that the government did not wish to extend the existing $4.8 billion loan package with the Fund. This credit line under the Extended Fund Facility (EFF), of which up to $3 billion has already been disbursed, is scheduled to expire at the end of this year. The announcement came one day after the government rolled back its most recent price increases on utilities--a key plank of the economic reforms agreed to with the IMF--after a two-week long, nationwide protest.
 
On 1 January, the government of President Megawati Soekarnoputri had raised the prices of fuel (22 per cent), telephones (15 per cent) and electricity (6 per cent). These price increases were directly in line with the government's commitment under the IMF programme to cut state subsidies and narrow the budget deficit. After the prices of utilities were raised, protesters hit the streets almost daily against the eighteen-month-old government. The subsidy cuts combined with inflationary pressures have hurt impoverished Indonesians the most. Inflation touched 10 per cent last year and the government forecasts a 9 per cent rate this year. In a country where more than half the population of 220 million live on less than $2 a day, and more than 40 million people are unemployed, these subsidy cuts really hurt the majority of the people.
 
The protests continued despite a government proposal to indefinitely delay the increase in telephone charges. Clearly, in a situation, where only 3 per cent of Indonesians have fixed telephone lines, delaying the rise in phone charges would have no impact and the demonstrators rejected the proposal saying it would be of no help to the poor. It was the fuel and electricity price hikes that were more severe and the target of popular anger. The World Bank--whose backing was vital for Indonesia to gain nearly $3 billion in financial aid at a donors' meeting to be held the following week--threw its weight behind the government, saying that the price hikes were necessary to wean the country away from hefty subsidies. Although the popular protests were not expected to escalate into deadly riots like those that had toppled former President Soeharto in 1998, the Megawati government, which faces elections next year, decided not to take any further chances and reduced the price hikes. The proposed new prices raise the cost of fuel by only 6.5 per cent, instead of the 22 per cent increase put in place in January. This backing down on fuel subsidies, further propelled the government towards making a decision on its IMF loans.
 
The decision to part ways with the IMF, in fact, comes as the culmination of years of discontent brewing within Indonesia, ever since the East Asian financial crisis savaged the country. There have, for long, been many in the various Indonesian governments who resented what they saw as interference by the IMF and the World Bank in policy-making, and there have been several battles of will between the IMF and the Indonesian government over the implementation of anti-poor 'structural adjustment' measures, amidst increasing protests by the people. This had led to the country's highest legislative body, the People's Consultative Assembly (MPR), urging the government in October 2002 to stop its cooperation with the IMF. In fact, it issued a decree requiring the government not to extend the current IMF programme when it expires late this year, as it believed that the Fund could not be of much assistance to overcome the country's economic crisis. Despite having been 'nursed' by the IMF for five years, the Indonesian economy was only getting worse because the 'recipes' provided by the Fund had proved ineffective. It was suggested that it would be better for Indonesia to overcome the economic crisis on its own by making optimum use of its capacities.
 
It was in October 1997 that Indonesia's recent tryst with the conditionalities-attached IMF loan package began, when the government turned to the Fund for an emergency debt package totalling $43 billion. This was soon after Indonesia's currency began sliding following the dramatic reversal of capital flows into the country, itself triggered by the 'contagion effect' that followed the devaluation of the Thai baht in July 1997.
 
Under its first three-year US$5 billion Extended Fund Facility to Indonesia, the IMF prescribed its now much-maligned tight macroeconomic formula: i.e. a strict monetary policy to stabilize the exchange rate and a tight fiscal stance to reduce the fiscal deficit. Interest rates were immediately increased in order to stabilize the rupiah. However, despite the IMF's intervention, the high interest rates failed to influence the exchange rate to any significant degree, as capital outflows continued. Further, the high interest rates led to a severe liquidity crunch. As the economy went into contraction, there was a steep rise in company closures and unemployment. While the Soeharto government maintained that the rapid spread of poverty made increased subsidies on items such as food and fuel essential, the financial markets construed President Soeharto's failure to embrace fiscal austerity in the January 1998 budget as a reflection of the IMF's inability to enforce discipline on the government. This led to further collapse of the rupiah, driving about 75 per cent of Indonesian businesses to technical bankruptcy due to the large foreign debts they had accumulated over the period of financial liberalization prior to the crisis. In this increasingly desperate situation, true to its tradition, in a new Letter of Intent (LI) issued in January 1998, the IMF secured a greater number of even more stringent reform commitments than in the October LOI. However, the introduction of this second package of IMF reforms also did not lead to immediate stabilization.

The January agreement led to sweeping reforms including the dismantling of state and state-enforced monopolies, elimination of consumer price subsidies, phasing out of utility subsidies, and further trade and investment liberalization. The specific steps to liberalize trade and investment included reducing tariffs on all imported foodstuffs products to 5 per cent and cutting non-agricultural tariffs to 10 per cent by 2003; opening banks to foreign ownership by June 1998; and lifting restrictions on foreign banks by February 1998. Since the start of the loan programme, the IMF has also persistently pushed the Indonesian government to further open its economy through various measures like the elimination of monopolies and cartels, reform of the wood sector, privatization of state-owned enterprises (SOEs) and downsizing of the National Logistics Agency (BULOG). As the International NGO Forum on Indonesian Development (INFID)^[i] has argued, the IMF has been constantly demanding rapid reforms, including quick sales of the Indonesian Banking Restructuring Agency's (IBRA) assets and privatization of hundreds of state-owned companies, regardless of the capacity of the state to carry out the reforms in the time-periods envisioned and the long-term impact of these programmes on the Indonesian economy or the poor. Each time there was a perceived delay in implementing any of the 'crucial' measures which the country had committed itself to in the Letters of Intent with the IMF, the Fund delayed its country review, on which the next tranche of IMF funds as well bilateral loans (i.e. from lenders in the CGI belonging to the Paris and London Clubs) hinged. These IMF interventions have resulted in the Indonesian economy being the worst affected among the five East Asian crisis-hit economies.
 
Prior to the 1997–98 financial crisis, Indonesia had a relatively comfortable debt situation. The government borrowed primarily from the World Bank, Asian Development Bank, and a group of bilateral donors grouped in the Consultative Group on Indonesia (CGI), for funding its development budget. Establishing this as a convention, the government avoided domestic borrowing, and Indonesia's debt/GDP ratio was considered sustainable by the multilateral bodies and other donors. Following the oil price crash in the early eighties, Indonesia undertook banking and financial sector liberalization without adequate or prudential protection of its system. While its debt management policies were considered adequate, its financial liberalization which exposed the Indonesian economy to the 1997 currency crisis was, until then, considered a successful experience.     
 
The situation changed in 1998–99, when Indonesia for the first time contracted a large volume of domestic debt to finance the bailing-out costs of the country's crisis-hit banking sector. The bail-out was necessitated by the crisis that occurred despite a decade of ostensibly successful World Bank/IMF-promoted financial liberalization, and because of the fact that the Indonesian government had followed IMF advice to immediately restructure its crisis-hit financial sector. With at least 70 per cent of bank loans estimated to be non-performing following currency devaluation and the financial crisis, at the direction of the IMF, the government closed sixteen insolvent banks in November 1997, without adequate preparation. The result was a near-collapse of the entire financial system, which in turn forced the government to recapitalize the banking system by issuing bonds to domestic commercial banks and the central bank. This created an estimated US$80 billion in new domestic debt, even as successive governments after Soeharto inherited the substantial foreign debts accumulated during his time. As a consequence, Indonesia's official debt burden increased from 27 per cent of GDP prior to the crisis to more than 100 per cent by the end of 1999, before declining gradually. In fact, Indonesia, which was ranked as middle-income and middle-indebted before the crisis (at the same level as its neighbours Thailand and the Philippines), now belongs to the SILIC (severely indebted low income countries) category, whereas none of the other crisis-hit East Asian countries such as Malaysia, Thailand or Korea are in the SILIC group.
 
The IMF has refused to assume responsibility for the way its wrong policy advice exacerbated the crisis and stalled the subsequent recovery. Further, instead of providing a long-lasting solution to the debt burden which they themselves had helped create and accumulate, the multilateral bodies and bilateral donors have continued to insist on policy measures requiring stringent constraints on expenditure and increased revenue mobilization, for servicing this sharply increased debt burden. This has crippled the capacity of the Indonesian government to mitigate the impact of the crisis on vulnerable groups. From an estimated 9.6 per cent in 1996--the year before the Asian financial crisis--Indonesia's poverty rate doubled to 19 per cent in 2001. The government has sought to support the increased number of people who have fallen below the poverty line with three kinds of measures: (1) temporary income transfers, through rice distribution to the poor at subsidized prices; (2) income support, through employment creation and by support for SMEs and cooperatives; and (3) preserving access to critical social services, particularly education and health.^[ii] However, most of the government's efforts to mitigate the impact on the poor have been limited by severe budget constraints. According to Bank Indonesia data, in 2001, total amortization and interest payments on Indonesia's domestic and foreign debt reached almost 35 per cent of central government expenditure. INFID (2001) estimated that the total amount of the government's debt service would have increased further to around 38.7 per cent of total spending in 2002. In comparison, critically needed development spending declined from about 45 per cent of total government expenditure in 1993 to 33 per cent in 2001, with more than half of this sum stemming from donor-financed development projects. According to INFID (2001 and 2003), social spending also suffered a dramatic decline, around 40 per cent in real terms below the spending in 1995/1996.^[iii] 
 
Meanwhile, notwithstanding the economic fall-out of the October 2002 Bali terrorist attack, the 2002 budget deficit is estimated to have fallen to under 2 per cent of GDP, down from 3.6 per cent in 2001. The windfall export earnings due to the oil price rise contributed to this. The year 2002 also witnessed a large reduction in Indonesia's public debt burden. The public debt to GDP ratio fell from about 90 per cent at the end of 2001 to almost 70 per cent by the end of 2002. Apart from the continuous reductions in government spending, this was achieved through major government disinvestment programmes and privatization. After the recapitalization of private banks, the IMF exerted strong pressure on the government to divest the assets it held in the form of banks' shares. The Indonesian Bank Restructuring Agency (IBRA) has now disposed of over half of the original portfolio of NPLs taken over from weak and closed banks. In 2002, the government also sold its majority stakes in two banks and in the international telecommunications company--Indosat. In fact, the government exceeded its 2002 privatization target of Rp 6.5 trillion, collecting Rp 7.7 trillion. However, according to INFID (2003), this divestment has produced relatively small revenues compared to the high costs of servicing the government bonds that had been issued to recapitalize those banks. Further, the privatization programme--particularly the sale of state-owned enterprises and assets while simultaneously retaining the debt--has aggravated the domestic debt burden.
 
The external debt stock has also fallen from its peak at the end of 1999. As Figure 1 reveals, annual debt payments until almost 2000 were achieved through swapping of funds across the available channels for raising funds. But, since 2000, the trends in all liabilities (total liabilities to banks, trade credit, claims on banks, multilateral and bilateral claims) have turned negative, reflecting the mounting debt repayment and servicing obligations for the country. It is thus evident that the economy will continue to face a severe liquidity crunch as outflows continue. Even though Indonesia had sought rescheduling from the Paris Club in 1998, 2000 and 2002, these agreements are only for bilateral debts and exclude debts to private bond-holders as well as multilateral creditors. Also, the rescheduling excludes the best terms (including partial write-offs) available under the Paris Club conditions. Further, the enforcement of the Paris Club agreement is conditional upon the progress of the programme laid out in the government's Letter of Intent to the IMF.

Figure 1: Indonesia's External Debt: Flow Analysis, 1990-2002 Q3

Despite its low income and SILIC status, the IMF and the World Bank consider that Indonesia does not qualify for debt relief under HIPC. The IMF and World Bank's assessment that Indonesia's debt is sustainable is sustainable is compromised by misleading and over-optimistic assumptions about Indonesia's growth rate, as well as by their status as creditors. According to the latest estimates from the Central Statistics Agency, growth rates in GDP, investment and export fell in 2002. According to Bank Indonesia data available till March 2002, net private capital inflows that turned negative in end-1997 have remained negative ever since. Another report has stated that while all the ASEAN countries have registered positive growth in FDI, Indonesian FDI inflows have failed to recover. An American-led attack on Iraq could further hurt investment in Indonesia, which has the world's largest Muslim population. A war in the Middle East is expected to send shipment costs soaring by more than a third and further erode cost-competitiveness. With a significant drop in tourism expected due to concerns about internal security following the Bali attack, and considering the effects of a slowing global economy since the previous forecast, growth in 2003 is expected to be about 1 percentage point weaker than previously estimated, or down to 3.5–4 per cent. On the other hand, while the share of oil and gas exports in total Indonesian exports showed a decline, from 31 per cent in 1992 to about 22 per cent in 2001, the share of oil and gas imports in total imports rose, from some 10 per cent in 1992 to 18 per cent in March 2002. Under these circumstances, servicing just the existing foreign and domestic debts will remain a huge burden on the country's development expenditures in the perceivable future, even without taking on new debt.

Those responsible for the creation of Indonesia's unpayable debts--the G7 creditors, the IMF and the World Bank--do not bear the financial risks associated with the loans they made to Soeharto, even as they continue to blame cronyism and corruption and seek legal and corporate reforms. In spite of the fact that a large chunk of this public debt in effect arose from their own misguided advice to the Indonesian government, the IMF and the CGI persist with their insistence on continued reduction of Indonesia's large public debt. It is clear that most of the costs arising from the failure of IMF/WB-supported liberalization of Indonesia's financial market and the malfunctioning of the banking system have been transferred from private financial institutions-- whether domestic or foreign--to the Indonesian public. This apportioning of costs between the public and private sectors has highly inequalizing consequences. At one level, the combination of a credit squeeze (the fact that the mandatory capital adequacy ratio was increased to 8 per cent last year as part of the government's programme to strengthen the banking system, also contributed to the credit squeeze), falling government expenditure for development purposes, and the increasing role of the private sector in public utilities with collusive pricing behaviour has led to unacceptable falls in the disposable incomes of Indonesian consumers. However, the inflexibility of the IMF in its fiscal deficit targets has made it difficult for the government to maintain subsidies at levels commensurate with falling income levels. At another level, the global economic slowdown, the uncertainties associated with the current conjuncture and the lack of international liquidity means that there are very poor prospects for quick resumption of export growth or of private capital flows into the country. Thus, by deciding not to extend the IMF loan, the Indonesian government has climbed out of the tough fiscal austerity prescriptions that have been hurting millions of its poor.

After initial uncertainty, Jakarta's donors under the Consultative Group on Indonesia (CGI) have signalled that they will give the nation the $2.6 billion aid it wanted for 2003, despite its backing down on fuel price. Clearly, the reality is that Indonesia is too big and too important to fail, as the Economist has conceded candidly. The IMF and the World Bank--key proponents of raising prices on utilities to cut costly subsidies--have now agreed that Jakarta's backdown has to be viewed against the fact that social unrest is not desirable and risks derailing what has been accomplished thus far. The World Bank, which is leading the Group's negotiations, had warned Indonesia earlier that resuming subsidies might jeopardize requests for new loans. Apart from being a big country, the fact that Indonesia has been afflicted with political instability and Islamic fundamentalism has also influenced the external decision-making process, especially in the face of the 2004 elections. Indonesia, though an ally of the US in the global war on terrorism, opposes military action in Iraq. In the current conjuncture, the donors are acutely aware of the danger of social unrest in the world's most populous Muslim nation, which has been buffeted by five years of economic turmoil since the 1997–98 Asian economic crisis. This is why, while earlier pleas that the Indonesian government is unable to repay its debt without imposing unbearable hardship on the poorest sections of society fell on deaf ears and the government was forced to undertake drastic measures, the present turnaround by the Indonesian government is seen as justifiable.
 
Recently, social and political unrest in many debt-ridden countries, primarily caused by conditionalities-imposed economic hardships, has come to be seen by the World Bank and the IMF as derailing the 'hard-won' financial stability in those countries; they have therefore allowed some flexibility in the reform measures demanded of these countries. Clearly, however, the more the desirable thing would be to avoid, in the first place, the ideological prescriptions that lead to such mass suffering. At another level, should not the multilateral bodies, which are linking up their aid and loan packages to democracy-linked electoral reforms in debtor countries, be viewing the popular protests as indicators of increasing political participation by the affected populations in these countries? Apart from democratic reforms, it is indeed interesting to see that the Bank and Fund-advocated decentralization, which on the whole is acknowledged to have proceeded satisfactorily, is now being perceived by them as a problem for both existing businesses and prospective investors, in terms of new and conflicting regulations and taxes at the regional level.
 
It has been seen time and again in East Asia, Latin America (where Argentina has witnessed the most recent devastation) and elsewhere that IMF–World Bank programmes which are driven by an absolutist ideology do not work at all in crisis scenarios, and in fact make them worse. It has also been seen that there is very little scope for these leviathans to change their course when confronted with the crises, failures and suffering perpetrated by their misguided policies until the consequences seem to affect the interests which they themselves represent. In a recent instance of reversal of stance, four years after describing Malaysia's decision to peg its currency to the dollar during the financial crisis in 1998 as a 'retrograde step’, the IMF has said that the peg is an 'anchor' of a rebounding economy.^[iv] In a December 2002 report, the Fund has stated that Malaysia is better off for having ignored its advice. Clearly, however, other East Asian crisis countries that followed the Fund advice are not going to benefit at all from this admission of the IMF. Further, despite such pronouncements at convenient times, the Fund continues to impose the same set of macroeconomic measures on countries facing a payments crisis. For instance, under an interim agreement reached after a year of negotiations, the Fund agreed to roll over, or reschedule, about $6.8 billion in Argentinian debt that is due through August. But it is feared that even the modest terms imposed as part of this agreement will include imposing sharply higher utility rates, creating bigger budget surpluses and severely restricting the amount of money in circulation, all of which will further deteriorate the prospects for economic recovery in that country. Thus, apart from delinking itself from its financial responsibilities in taking on the risks of its sovereign credits, and perversely gaining from major policy errors and going on to compound them, the Fund has demonstrated that it has no moral responsibility either.
 
Against this backdrop, Indonesia's decision to finally ask the IMF to pack its bags rather than continue to follow the path to utter deprivation for its citizens, clearly seems to be the most 'rational' choice that could have been made. This is the latest in a series of instances where a number of countries, including Botswana, have either opted out of IMF programmes or refused to initiate the structural adjustment programme (SAP). This is clearly reassuring and holds the promise of encouraging further such 'rational' choices among countries facing the pressures of neo-liberal reform. This will also encourage countries to turn towards seriously addressing their domestic socio-economic problems.
 
In the final analysis, it is important to ensure that small developing and least developed countries do not get left out in the geo-political power game. While individual initiatives by large developing country borrowers have immense significance of their own, across the South, the struggle for forcing broader and deeper changes in the parameters within which the multilateral bodies operate, must continue.

Select references:

Bullard, Nicola, Walden Bello and Kamal Malhotra, 1998, "Taming the Tigers: the IMF and the Asian Crisis", in Jomo K.S., ed. Tigers in Trouble, Zed Books, p. 94.
Jacques-chai Chomthongdi, The IMF's Asian Legacy, Focus on Trade, September 2000.
2.Economist, The Emerging Markets' Scapegoat, Jan 23, 2003.
4. Position paper of INFID: To the CGI Member and the Government of Indonesia - 4/10/2000 from http://infid.or.id.temp.client.org/wm
Rudy De Meyer, The New Debt Problem: Lessons From the Past? EURODAD, Belgium, Paper Presented to 12th INFID Conference, 14-17 September 1999 from http://infid.or.id.temp.client.org/
INFID Statement to the CGI Meeting in Bali, January 21st – 22nd, 2003 available at www.infid.or.id
Richard Robison and Andrew Rosser, "Surviving the Meltdown: Liberal Reforms and Political Oligarchy in Indonesia" in Richard Robison et al., ed., 2000, Politics and Markets in the Wake of the Asian Currency Crisis, Routledge, London.
Hal Hill, "Indonesia in Crisis: Causes and Consequences" in Yun-Peng Chu and Hal Hill, ed., The Social Impact of the Asian Financial Crisis, Edward Elgar.

[i] INFID is a network of NGOs from Indonesia and the member countries of the Consultative Group for Indonesia (CGI) committed to providing critical input and recommendations to the CGI on developmental issues in Indonesia. CGI is a consortium of 30 donors to Indonesia-both bilateral and multilateral, chaired by the World Bank.
[ii] INFID, 2001.
[iii] Ibid.
[iv] Bloomberg News, Wednesday, December 11, 2002. In 1998, during the Asian financial crisis, Prime Minister Mahathir bin Mohammad ignored the Fund's standard advice to raise interest rates to keep the currency from sliding, and pegged the ringgit at 3.8 to the dollar and imposed restrictions on funds leaving Malaysia. An "extremely retrograde step," was how Stanley Fischer, then deputy managing director of the fund, described Mahathir's policy. But, imposing capital controls allowed Mahathir to slash interest rates and jump-start the economy without undermining the value of the currency.

February 25, 2003.