Jul 24, 2024 Last Updated 5:22 AM, Jul 16, 2024

The IMF burden

Bonnie Setiawan

Suharto’s development led policy agenda saw the Indonesian economy become increasingly integrated into the global economy. Neo-liberal understandings between economists saw the deregulation of Indonesia’s banking and finance sector, and the implementation of a number of policies, regulations and government programs that served the interests of corporations. These conglomerates had connections with the New Order, and in particular the Suharto family.

Under Suharto, crony-businessmen grabbed a number of national assets and natural resources through this ‘liberalisation’ to satisfy their greed and their luxurious lifestyles. Globalisation allowed these cronies to take control of large sections of the national economy, seriously compromising national sovereignty in the process. With such power at the national level, they were able to obstruct the interests of global capital for their own interests, and to obstruct free market mechanisms. What they wanted was to ensure their hegemony within Indonesia.

While the Indonesian elite is indeed guilty of causing much of the poverty and misery of the vast majority of Indonesians, the liberal economic system and global capitalism are also to blame, as are their enforcers, such as the International Monetary Fund (IMF), World Bank and neo-liberal economists globally. Such actors are quick to blame the Indonesian elite and to attribute much of the suffering to poor governance — collusion, corruption and nepotism. This allows them to cover up their own role in creating and exacerbating the on-going economic crisis in Indonesia. There are a number of events — the result of globalisation — that are indicative of this.

Plundering Indonesia’s central bank

As part of the economic crisis recovery program, the IMF together with the World Bank and the Asia Development Bank (ADB) forced through a Letter of Intent (LoI) in October 1997, signed by the near bankrupt Suharto regime. Part of the LoI included an assistance package to ensure the liquidity of Indonesia’s banking sector. This bailout scheme saw the burden of irresponsible loans made to private and state run firms transferred onto the nation through the Bank Indonesia Liquidity Assistance program (BLBI).

Initially, the assistance that Bank Indonesia (BI) gave to 48 recipient banks experiencing liquidity problems was dubbed ‘Credit’, thus forming debt that the recipient banks owed to BI. This was later changed to ‘assistance’, so that lines of responsibility were no longer clear. Bank Indonesia’s right to collect debts was transferred to the state through government ‘Letters of Obligation’ totalling some Rp 164.53 trillion. The government also issued Rp 53.77 trillion worth of Letters of Debt to supply funds for a program of guarantees. Thus national resources were used to prop up banks that were experiencing liquidity problems as a result of their own corrupt, fraudulent and mismanaged lending practices under Suharto’s crony-capitalist system.

Although the loans were guaranteed with interest, in the end they became a drain on state finances. According to the investigative audit report carried out by Indonesian Auditing Agency, as much as Rp 144.53 trillion worth of funds was syphoned off by the receiving banks and by officials at BI. This meant that Rp 138.44 trillion or 95.78 per cent of the bank liquidity program funds could be written off as state losses.

The consequences of this IMF led Bank Financing program on the Indonesian State Budget are extraordinary. The government now uses 18.9 per cent of the State Budget to pay instalments and interest on the Rp 55.7 trillion BLBI debt. This is compared to the 11.3 per cent is spends on development purposes, and 16.4 per cent on subsidies to the poor. It is ordinary Indonesians who are bearing the brunt of this irrational development program.

Poverty band-aids through debt

In the aftermath of the financial crisis in Indonesia, the World Bank and ADB set up a program of loans known as Social Safety Net Adjustment Loans (SSNAL). The SSNAL was divided into 12 programs, including Special Market Operations, Regional Empowerment and Economic Recovery, Operational Aid, and Urban Worker Programs. The SSNAL budget for 1999–2000 was Rp 15 trillion.

From the outset, activists opposed the SSNAL scheme, arguing that it would increase the burden of debt on Indonesians and would provide little more than a band-aid solution to endemic economic problems. As they feared, much illegal diverting of these funds did occur. As much as Rp 8 trillion of the Social Safety Net (JPS) funds were used for the East Timor autonomy campaign and the 1999 Election campaign. Misappropriation of Regional Funds for Overcoming the Economic Crisis, to the tune of Rp 4.5 million, was particularly wide spread at the regency (kecamatan) level.

Although it was clear that the program was being rorted, the World Bank and the Indonesian government continued this program. Legal cases for unaccounted funds of up to Rp 227.9 million were pursued. Only after it was evident that this program could damage the credibility of the World Bank was it finally cancelled. However, Indonesians will continue to repay the loans for generations to come.

Food self-sufficiency ends

Through the Letter of Intent and the Memorandum of Economic and Financial Policies of 11 September 1998, the IMF demanded that tariffs on the importation of rice be completely abolished. This demand was extended to other food products such as corn, soybeans, flour and sugar. This was in accord with Indonesia’s ratification of the Agreement on Agriculture of the World Trade Organisation, which aimed to eliminate or reduce tariffs and subsidies on agricultural products.

Further LoI price liberalisation regulations were passed for fertiliser and other inputs into rice production, effectively ending government subsidisation of the production of basic foods. Subsidies to farmers through the Farmers Credit scheme were also reduced. As a result, farmers faced rapidly increasing production costs and rapidly falling prices for their goods. Cheaper rice was imported from overseas, and local farmers could no longer compete with these imports.

In March 2000, it was estimated that the nation needed 32 million tonnes of rice. National production ran at 30 million tonnes. However, 9.8 million tonnes of rice was imported, rather than the required two million tonne shortfall.

In response to sharp criticism from farmers and others, a 30 per cent tax was slapped on rice imports, much to the chagrin of the IMF. However this appeared to be no obstacle to importers, who made a profit by importing rice from Thailand, Vietnam and Australia. Imported rice from Thailand was sold on the market at Rp 1,600 per kilogram, and rice from Australia was sold at Rp 1,400 per kilogram — at a profit of about Rp 600 per kilogram.

Rice is still being imported into Indonesia in vast quantities. This has seen local prices for rice plummet to as low as Rp 600 per kilogram, whilst the price of fertiliser sits at Rp 700 per kilogram. The end result is the collapse of Indonesia’s food self-sufficiency. Small-scale farmers are going bankrupt causing untold damage to local economies. Liberalisation of the basic food market is directly impacting the capacity of the nation to feed itself.

Creating a land market

The Indonesian government together with the World Bank and AusAID are undertaking a wide-scale Land Administration Project (LAP). This is an ambitious project aimed at deregulating the land market under the auspices of a ‘Land Resource and Management Planning’ scheme, to be implemented over 25 years (1995–2020) in five year stages. The objective is to change the management and administration of land ownership with the ultimate aim of creating a land market.

Land Administration Project I (1995–2000) cost about US$ 140.1 million and was funded in part by the Indonesian state (US$ 44.9 million or 32 per cent of the cost). The remainder was funded through loans from the World Bank (57 per cent of the total cost or US$ 80 million) and through an AusAID grant of US$ 15.2 million.

The World Bank’s own report entitled: ‘The Social Assessment of the Land Certification Program: The Indonesia Land Administration Project’, noted that LAP I had a number of problems, including that the project was unsustainable because 62 per cent of the Land Adjudication Team left after the project was completed. In addition, millions of hectares of land in Java have ‘residual claims’ on them as a result of the fact that the land was taken by force from the people during the New Order. The problem of these ‘residual claims’ must be resolved before land certificates can be processed. LAP I also appears to have a negative effect on women, because women’s names were not registered on land title certificates under the New Order.

The Indonesian Land Agency has been deceptive about the burden of debt. The payment of debt incurred as a result of the LAP program was supposed to be recovered through the Law of Obtaining of Rights over Land and Buildings, in which it is specified that every land transaction or building worth more than Rp 30 million will incur a tax of five per cent. Once more, it is the Indonesian masses that will be burdened with the payment of debt.

Despite protests from various quarters, LAP II is underway, and will include reform of land owned by communities through traditional law (adat). LAP II will cost US$ 110 million, of which the Indonesian government is paying US$ 20 million, and a US$ 90 million World Bank loan is funding the remainder.

Bonnie Setiawan (bonnie@globaljust.org) is a researcher at the Institute for Global Justice in Jakarta. http://www.ourworldisnotforsale.org/members.asp

Inside Indonesia 77: Jan - Mar 2004

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