International press

Indonesia IMF payback is end of key chapter for Asia

3 July 2006 by Turkishdailynews

Indonesia’s move to repay its International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(IMF) debt early marks the final chapter of the financial crisis that tortured Asia almost a decade ago, just as investors are again growing wary of emerging markets.

Indonesia is the last of the Asian countries hit by the 1997/98 crisis to pay off its debts, which will free it from the IMF and the policy prescriptions it has grudgingly accepted.

The plan to repay as early as this year $7.8 billion of loans due in 2010 will save $200 million in net interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. and give the government greater autonomy.

Discussions will no longer be needed, so that the government can 100 percent pursue its policies. It can be said that we no longer need a supervisor,” Indonesian Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

Deputy Governor Hartadi Sarwono told parliament.

While that would give Indonesia room to go slow on sensitive issues such as privatization of state firms, analysts see it as unlikely to significantly alter the country’ economic outlook due to current account surpluses, a falling debt-to-GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
ratio and a low budget deficit.

Indeed, a sell-off in emerging markets that began last month and the need to build investor confidence means Jakarta will likely pursue economic policies broadly similar to those prescribed by the IMF, at least for a while.

Indonesia depends less on global trade than neighbors Malaysia and Singapore, making domestic factors critical in assessing its outlook.

I always look at Indonesia not so much from the world but where they are slipping on liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. management, where are they slipping on fiscal,” said Greg Fager, director for Asia at the Washington-based Institute of International Finance, an umbrella group for 340 of the world’s private sector banks.

For example, a year ago we were concerned there was too much liquidity in the market and we were watching the oil price escalating. I don’t see those kinds of policy imbalances right now,” he said.

Last week, central bank governor Burhanuddin Abdullah said half the loans would be repaid within weeks and the remainder could be settled later this year due to growing foreign exchange reserves.

Indonesia’s foreign exchange reserves rose to a record $44.17 billion at the end of May, up almost 30 percent this year.

Still, some economists believe that the current market turbulence may see Indonesia hold off on paying back the IMF.

The end of the IMF loans comes as Asia seeks a greater say in the affairs of the Washington-based lender, to reflect its increasing global weight.

Increased Asian representation could give the IMF more credibility in a region with reserves so vast it does not necessarily need the IMF’s help if there were another crisis.

After the Asian crisis, a regional network of bilateral swap arrangements was established for countries to borrow funds from each other to defend currencies at times of crisis.

It reflects a new era, with growing confidence on a stronger regional cooperation to help countries if there were a crisis again,” the central bank’s Sarwono told Reuters.

He also said there was a possibility of the IMF raising its charges on the countries still under its loan program — Turkey and Indonesia — as early paybacks by Brazil and Argentina had weakened its finances and prompted it to take austerity measures.

Stephen Schwartz, the IMF’s senior representative in Indonesia, has told Reuters the fund welcomed the early repayment plan as it reflected an improved balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. and strengthened economic fundamentals.

But privatization, which had been a key plank of the IMF program, has largely stalled under the current administration. The vice president has even called for shares in key firms to be bought back.

(The IMF) in the past asked for privatization for transparency. But the proceeds had been used to cover budget deficit. That’s wrong because budget deficit is a political choice, whether it zero or whatever number,” Said Didu, secretary to the minister of state enterprises, said.

Still, analysts felt that Indonesia, while better able to pay attention to domestic political sensitivities once the loans are paid off, would not risk antagonizing investors.

Last year, fears that costly oil subsidies would cause a budget crunch sparked a plunge in the rupiah currency and worries of a broader economic crisis. The government responded by slashing fuel subsidies and the central bank hiked rates sharply, stemming the capital outflow and calming markets.

Indonesia and many regional neighbors have made progress in recent years including a swing to current account surplus, leaving them less vulnerable than during the mid-1990s,” said Singapore-based director of Asian Economic Forecasting David Cohen of Action Economics.

However, that is not to say that a renewed panic by investors would be painless.



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