Pulling a few of its punches, the IMF strikes a third deal with Indonesia. Will this one last?

By ANTHONY SPAETH

he International Monetary Fund has a reputation for beating on countries that come asking for money. Its one-two punch consists of "austerity measures" and "structural reform." But in these days of the Asian financial crisis, the IMF is lightening up just a bit on its clients, especially the really big, crucial-to-the-world-economy borrowers like Indonesia. It's true that the Fund still gets tough from time to time, as it did in late February when it delayed $3 billion in loans to President Suharto's unrepentant regime, but IMF honchos like Deputy Managing Director Stanley Fischer keep coming back to Jakarta, with billions of dollars in their pockets, for more rounds of negotiations. Last week Indonesia clinched its third agreement with the IMF in less than six months--clearing the way for further loans of up to $40 billion--and there were smiles all around. "With a restoration of confidence in Indonesia's economy and an improvement in the rupiah exchange rate," said senior economic minister Ginandjar Kartasasmita, "various other problems such as the rapid inflation will also be solved."

Of course, that's what everyone said at the last two signings in October and January--and, in fact, the IMF keeps returning because Indonesia's economy only gets worse. The United Nations recently announced that 7.5 million Indonesians will have trouble affording, or even procuring, food in the foreseeable future. Students are protesting against the government--some of their leaders have mysteriously vanished--and an estimated 80% of the country's private firms are technically bankrupt. The government admits that the number of unemployed will rise to 20 million this year, compared with 4 million in 1997. In circumstances like that, even commercial bankers get nasty, and so they have: Indonesian exporters, the only group in the economy that has a fighting chance thanks to the drastically devalued rupiah, can't even trade because hardly anyone will recognize letters of credit issued by Indonesian banks.

The IMF came in last year with some pretty stern prescriptions, including hacking of budgets, winding up of subsidies, and wholesale amputation of rotten parts of the economy, whether they be capsized banks or lucrative monopolies controlled by government cronies. Suharto didn't like many of those conditions--nor the attitude of the IMF. That put him in a confrontation with the Fund, and led to five months of backpedaling, bluffmanship and barely-disguised nose-thumbing at IMF headquarters in Washington.

But it was impossible for the Fund to back away. A further deterioration in Indonesia would cast doubt on similar IMF programs salvaging Thailand and Korea--and possibly deliver a broadside to Japan's rickety banks, which have major exposure to Indonesia. That made Suharto vs. the IMF a match that couldn't be called off. "It's like two scorpions in a bottle," complains one IMF staffer in Washington. Jakarta publisher Aristides Katoppo looks at it slightly differently. "The metaphor should be one of two escaped convicts shackled together," he says. "They have some common interests, and also some diverging interests. But to accomplish anything, they have to cooperate."

With Round 3 concluded last week, it's still impossible to tell who's winning. The IMF is as tough as ever in most areas, but more lenient on subsidies. (To soften the plight of Indonesia's poor, the IMF withdrew its demand that the government stop subsidizing the prices of rice, soybeans and fuel.) And everything depends on whether Suharto follows through on his promises, as he failed to do in the past. Minister Ginandjar pointedly announced last week that "there should be no doubt about Indonesia's committment to reform." The agreement also had a finger-wagging clause saying that there would be "daily" monitoring by the IMF.

Which, at the very least, shows how far the process has come from mid-November, when IMF Managing Director Michel Camdessus told a crowded press conference that the first program would bring stability to Indonesia--but refused to disclose a single specific condition. It remained, in effect, a secret pact with plenty of plums for Suharto. The "national car" project of youngest son Hutomo Mandala Putra, or Tommy, was spared dismantling, along with a white elephant project to build airplanes. A wheat import monopoly was allowed years to wind up. Sixteen banks got shuttered, but weeks later, one of those banks, controlled by Suharto's second son Bambang Trihatmodjo, was still in business with different nameplates on its branches' doors.

The first plan signally failed to restore confidence: the stock exchange hit a four-year low and the rupiah languished. When a delusionary budget for fiscal 1998-99 was released in January--predicting 4% growth and 9% inflation--the currency's value plummeted. People across the archipelago started hoarding food.

So on January 15, a revised IMF package was signed containing 50 points, all made public. The next day's papers carried a photograph of Camdessus, arms folded and grinning, standing behind a seated Suharto as he put pen to paper. Camdessus wasn't grinning for long. The 76-year-old President soon started criticizing the accord, hinting at incompetence on the part of the IMF, and backtracked on a slew of promises, including the cessation of the clove monopoly controlled by son Tommy. The Clinton Administration put out tart statements and dispatched elder statesman Walter Mondale on an apparently fruitless mission to hammer Suharto into compliance. Meanwhile, the president announced that he was considering setting up a currency board that would peg the rupiah at a certain rate--a plan so plainly unfeasible that most in Washington considered it little more than a provocation.

It was close to war. Camdessus wrote Suharto saying the spigot was going to be turned off if the currency board was established. Suharto fired his central banker and in March replaced his respected, technocratic cabinet--largely pro-IMF reforms--with a team that included daughter Siti Hardiyanti Rukmana and Mohammad "Bob" Hasan, who controls, among other mega-businesses, the country's plywood monopoly.

Then hostilities began to abate. The IMF's Fischer conceded that a currency board was possible in the future. He also said the food situation was so bad that subsidies might have to be continued under any new package. Someone somewhere leaked an internal IMF document concluding that the first two agreements may have been too harsh. That led to last week's breakthrough.

But Indonesia can hardly rest easy. The economy will probably decline 4% this year, and the government will have to spend billions on food subsidies and an ambitious plan to underwrite corporations' foreign-denominated debts. If Suharto keeps sparring with the IMF and ducking reform, his people won't be winners.

--Reported by David Liebhold /Jakarta and Bruce van Voorst /Washington

THE IMF VS. INDONESIA, ROUND 3

Points for the IMF

1. Indonesian government to support restructuring and repayment of corporate offshore debt

2. Privatization of state-owned enterprises to be accelerated

3. Shutting down or changing the management of insolvent banks to be continued

Points for Indonesia

1. Gets to keep subsidies on rice, soybeans and fuel

2. Gets to run a budget deficit of 3.2% of GNP, as opposed to 1% in earlier deal

3. Keeps on receiving IMF money

And the winner: call it a draw