Indonesia has made the long awaited announcement that it is going to leave the International Monetary Fund loan program at the end of the year. That presents a number of challenges for the government of President Megawati Sukarnoputri.
Indonesia has been reliant on funding from the IMF since its economy almost collapsed during the Asian financial crisis in the late 1990s.
The country now owes $9.2 billion to the IMF, and it has said that it will repay the money over six years. In order to satisfy the fund's conditions and reassure investors, IMF officials will still monitor the country's finances.
Some economists are worried that without the steadying hand of the IMF, the administration will be less inclined to tackle reforms that are politically sensitive, but necessary. "That would be a concern for money market players, that without the IMF carrot and stick, the government would not have the discipline to do the most politically sensitive reforms," said Fauzi Ichsan, an economist with Standard Chartered Bank in Jakarta.
Some observers said that Jakarta's biggest problem may be rescheduling $3 billion loaned on the condition that Indonesia remain in the IMF program.
But there has been strong pressure from within the government to end its arrangement with the IMF before the general election next year. For many Indonesians, dependence on IMF loans recalls the national humiliation exemplified by an image of the then-chairman, Michel Camdessus, standing like a stern parent behind former President Suharto as he signed the loan agreement.
Withdrawing from the IMF program is expected to play well when President Megawati Sukarnoputri stands for re-election next year.
Analysts say Indonesia has come a long way from the corrupt crony economy of former President Suharto's time in office, but they warn Indonesia still has a long way to go before investors regain confidence in the country.
