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5. Stronger Programme with Weak Commitment
- ISEAS–Yusof Ishak Institute
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142 Chapter 5© 2005 Institute of Southeast Asian Studies, Singapore 5 Stronger Programme with Weak Commitment First Review Confronted with deteriorating economic, financial and banking conditions towards the end of 1997 and beginning of 1998, the government undertook a variety of adjustment steps. But since the programme was part of the agreement with the Fund in a stand-by arrangement, a review to evaluate the implementation of the programme, including compliance to performance criteria and other conditionality as stipulated in the first letter of intent, had to be conducted. The evaluation of programme implementation would determine whether a drawing from the loan could be made. The evaluation was also needed to determine any other changes or additional steps that should be included in the adjustment programme. The second LOI was negotiated directly by President Soeharto with the Fund team. The new programme of financial restructuring and economic reform was basically an enhanced and improved programme of the one contained in the first LOI. President Soeharto himself signed the second LOI on 15 January 1998. The President’s direct involvement was an extraordinary step. Reproduced from Bank Indonesia and the Crisis: An Insider’s View by J. Soedradjad Djiwandono (Singapore: Institute of Southeast Asian Studies, 2005). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at Stronger Programme with Weak Commitment 143© 2005 Institute of Southeast Asian Studies, Singapore In the IMF’s review of 7 January 1998 it was stated that “performance under the programme so far has been decidedly disappointing”. It was further stated that “although some progress has been made, there have also been policy slippages in every area of the programme”. In particular, it was noted that the interest rates finally being raised would not be sustainable due to pressures from government officials who demanded the lowering of rates. The promise to produce a budget surplus also seemed to be remote. Most troubling, in the Fund’s evaluation, was that the authorities had taken a number of structural steps backward, especially in governance.1 The review noted further that as a result of the policy performance, hard-won market confidence, built up over three decades of rapid economic progress, and revived at the outset of the arrangement, had vanished. The development had prompted the collapse of the exchange rate. By this time the US dollar rate to the rupiah was over 9,000 from 3,200 in the first week of the arrangement. The Fund asked the government to demonstrate a public and unequivocal commitment to the adjustment programme that had been agreed upon. The review stated that: The envisaged measures need to be implemented, in full and according to schedule, as part of a steady drumbeat of policy announcements, designed to reassure the public that the programme is, in fact, being implemented. At the same time, the government needs to eschew measures that are contrary to the spirit of the arrangement, especially those which suggest that some groups will be favoured and shielded from the need to take painful adjustment measures, as this only undermines confidence and fans discontent. The government was asked to face the severe crisis by strengthening policy reforms through an accelerated implementation of measures already agreed, as well as adopting further measures. In particular, the Fund asked the government to strengthen structural reforms, to accelerate financial sector restructuring, and to bring budget prospects back on track. It was obvious that the adjustment programme as stipulated in the first LOI was not implemented in a consistent or timely manner. However, there were different opinions as to why this was so. Prior to the second LOI negotiations, the Fund’s Board of Executive Directors indicated their concern about the drastic rupiah depreciation. In their evaluation the currency plunge reflected the poor implementation [107.22.56.225] Project MUSE (2024-03-29 07:21 GMT) 144 Chapter 5© 2005 Institute of Southeast Asian Studies, Singapore of the adjustment programme and gave confusing signals to the market. The confusion resulted from statements by government officials demanding that the central bank lower the interest rate and increase liquidity. Both were considered to contradict what the government was expected to do under the circumstances. In addition, they were also concerned about the inconsistencies in the implementation of structural reforms.2 The Fund asked the government to implement the...