IMF Indicates Flexibility in Negotiating With Indonesia

The International Monetary Fund extended an olive branch to Indonesia on Tuesday in the wake of President Suharto’s reelection, indicating that it is willing to be more flexible in negotiating modest changes to the country’s economic reform program.

In an important political signal, Stanley Fischer, the IMF’s deputy managing director, said the 182-country organization is “deeply mindful . . . of the events taking place in Indonesia,” and suggested “there is room for flexibility” in the IMF’s demands.

Officials confirmed later that Fischer’s remarks, made during a press conference, were intended to deliver a message to Suharto that the fund is now willing to renegotiate some of the demands it has made as part of a $43-billion financial rescue package for Indonesia.

Although Fischer did not specify precisely what changes the IMF would be willing to make, he hinted they would involve humanitarian issues primarily, such as allowing Indonesia to continue subsidizing food imports to help offset the recent plunge in the rupiah.

However, IMF officials insisted that the flexibility does not include possible IMF acceptance of a plan Suharto is considering to link the rupiah to the U.S. dollar through the use of a currency board, which private analysts say would exacerbate Indonesia’s recession.

Fischer’s public gesture to Jakarta came as Indonesia said it was preparing to send a high-level economic team to Washington to meet with top IMF and U.S. officials in an effort to resolve its impasse with the IMF.

Indonesia agreed in January to carry out a lengthy list of IMF-mandated reforms, but so far has either backed away from or undercut virtually every major component of the plan. Meanwhile, Suharto has been telling visitors that the IMF’s prescriptions have failed.

In a warning to Suharto last Thursday, the IMF disclosed it was postponing consideration of a scheduled $3-billion installment of its loan to Indonesia that was slated to be approved this week--a threat that it might cut off the loan money entirely.

The IMF has been criticized by many private analysts for being too tough on Indonesia. Even the Clinton administration is split, with the Treasury Department favoring a harder line and the State Department pressing for a more flexible stance.

Some analysts fear that both sides have pushed the situation to a point where it will be difficult for either to pull back and still maintain political credibility. Suharto asserted Sunday that many of the IMF reforms violate the Indonesian constitution.

The IMF took a similar turn in December in its negotiations with South Korea, which also had seemed to be at an impasse. Immediately after the South Korean elections, the two sides revived negotiations and worked out some modest, but politically important, changes.

Fischer told reporters Tuesday that “there is room for flexibility [with regard to Indonesia] in the way that we have demonstrated in [South] Korea and in Thailand,” adding, “we always change the programs with changes in circumstances.”

He said the message had been delivered to Suharto “through many channels”--presumably including former Vice President Walter F. Mondale, who visited Indonesia earlier this month as President Clinton’s personal envoy.

Nevertheless, Fischer’s comments marked the first time a senior IMF official has signaled such flexibility publicly. As late as Monday evening, IMF Managing Director Michel Camdessus had warned that if the impasse is not resolved soon, the Asian crisis could intensify.

Both the IMF and the Clinton administration are hoping to launch a major new push to negotiate a compromise that will keep Jakarta in the IMF camp. Stapleton Roy, the U.S. ambassador to Indonesia, returned to Washington on Tuesday for consultations.

Despite Tuesday’s olive branch, however, both U.S. and IMF officials cautioned that the risk of a rupture between Indonesia and the IMF has not abated. The two sides still are far apart, and Suharto appears ready to appoint a hard-line cabinet that may be unwilling to bend.

Analysts fear that unless the two sides can work out a compromise, Indonesia almost certainly will plunge deeper into recession, exacerbating the overall Asian financial crisis--and possibly sparking new domestic political unrest throughout the region.

Officials say they still are not certain which way Suharto will go in dealing with the IMF and the United States. The 76-year-old Indonesian leader has been enigmatic at best, seeming to promise support for the IMF program one day, then denouncing it a few days later.

Some say that while Suharto endorsed the IMF package in January because he was convinced that there was no other choice, he has since had serious second thoughts--partly under pressure from his family, whose business holdings would be adversely affected.

There also are reports that Suharto, who is used to winning plaudits for the economy’s performance, has become disillusioned with the technocrats who have set and carried out Indonesia’s economic policies.

* INDONESIA’S WOES: Suharto faces vast problems, limited options in new term. A4