ABSTRACT

The so-called International Monetary Fund (IMF)-supported programmes for Indonesia began with the signing of the first letter of intent (LOI) at the end of October 1997 and extended over a six-year period until the termination of the last one at the end of December 2003. During this period, four different governments implemented the reform programmes with varying degrees of success. Three factors influenced the outcomes: IMF conditionality, ownership of the programme, and capacity to implement (Boediono 2002). Under President Soeharto, difficulties in implementing the programme were

apparent from the outset. The President was unhappy with the immediate step taken under the programme to close sixteen banks, including a bank owned by one of his sons. He also appeared rapidly to lose confidence in the programme as the country’s economic conditions continued to worsen. He began to seek advice from groups other than his economic team and toyed with alternative ideas, such as the Currency Board System, to replace the IMF programme. It has also been pointed out that the inclusion of a structural reform agenda

in the programme, as well as measures for macroeconomic stabilization and improving the health of the financial system, could have been the main reason why the programme ran into great difficulties (Soesastro and Basri 1998). IMF conditionality required the dismantling of the clove monopoly and the withdrawal of governmental support for the national aircraft industry and for the Timor national car projects, all involving people who were very close to President Soeharto. These measures were not urgently needed for overcoming the crisis, but they were included because improving governance was seen as important for restoring public and market confidence in the government. The implementation of the programme was characterized by rapidly weakening ownership. Poor implementation was not due to the capacity of the bureaucracy that, with all its shortcomings, was still functioning.2