Inflation the worst problem of the economic crisis<\/p>\n
News of the recent pledges of US$6 billion and $7.9 billion in
\nfresh aid from the International Monetary Fund (IMF) and members
\nof the Consultative Group on Indonesia (CGI) respectively failed
\nto substantially strengthen the rupiah. Economist Sri Mulyani
\nIndrawati from the University of Indonesia discusses why and
\nlooks to the future for the economy.<\/p>\n
Question: Why has the rupiah remained weak to this day?<\/p>\n
Answer: The money market should have taken the aid announcements
\nas a good sign for the rupiah, but in fact the announcement had a
\nvery small psychological impact and received a very cool reception
\nfrom the market because many believe the country has lost
\nmomentum in its efforts to promote economic recovery.<\/p>\n
Indonesia is also considered as having failed to make headway
\non political reform conducive to establishing a strong platform
\nfor economic recovery. There is a feeling that political support
\nfor President B.J. Habibie and his government is so thin that he
\ncannot launch an adequate agenda for political and economic
\nreform. Meanwhile, consolidation in the Armed Forces (ABRI) has
\nfailed to impress the general public.<\/p>\n
Q: Do you think the rupiah will strengthen?<\/p>\n
A: Assuming that the demand for dollars decreases in line with
\ndeclining imports and the rescheduling of official and corporate
\ndebt, while at the same time the dollar supply rises as a result
\nof the disbursement of aid from the CGI and the IMF, then we
\nwould expect the rupiah to strengthen to about Rp 11,000 to the
\ndollar in August or September. The rupiah may then strengthen
\nfurther to Rp 10,000 by the end of the year if the banking sector
\nbecomes fully operational and exports are rise, providing we have
\nno further political upheavals.<\/p>\n
The increase in demand for goods prior to the Idul Fitri
\nholiday early next year and social mobilization ahead of the
\ngeneral election in May might cause the rupiah to weaken again in
\nthe first half of 1999.<\/p>\n
Q: What do you think about the surge in inflation?<\/p>\n
A: High inflation is the most critical problem facing the
\ngovernment. The government will never be able to restore the
\ncredibility of the rupiah while inflation continues to rise. High
\ninflation is partly caused by increases in the aggregate demand
\nfor goods and services at a time when production and distribution
\nhave been disrupted.<\/p>\n
Aggregate demand is being increased by Bank Indonesia's
\nmonetary expansion policy, which is providing capital (worth
\nabout Rp 139 trillion or $10.7 billion) to commercial banks
\nfacing liquidity problems, and by the government's expansive
\nbudget (with a budget deficit of Rp 127.8 trillion, which will be
\nfinanced by foreign aid).<\/p>\n
Judging from these factors, inflation is likely to reach
\nbetween 80 percent and 90 percent in 1998.<\/p>\n
Q: Do you agree that the recession has yet to bottom out?<\/p>\n
A: Indicators like inflation and employment show that the economy
\nhas not reached the bottom of the crisis. It's now very difficult
\nfor us to stop the economy from deteriorating even further
\nbecause of the government's negligence when the crisis first
\nbroke.<\/p>\n
Inflation has the potential to worsen in the coming months
\nbecause the prices of imported goods have yet to adjust to their
\nprojected levels and the government is still providing huge
\nsubsidies for fuel, electricity and food consumption.
\nUnemployment is expected to rise until the end of the year, while
\ncommercial banks are quite vulnerable to increases in non-
\nperforming loans. I think the economy will contract by 15 percent
\nthis year and will continue to contract until the first months of
\n1999 at the earliest.<\/p>\n
Q: Do you expect private capital to return to the country?<\/p>\n
A: If officials and politicians fail to create a business
\nenvironment conducive to investment, Indonesia will experience a
\nlost decade marked by sharply rising prices and the absence of
\nsynchronization between monetary and fiscal policies.<\/p>\n
Q: How do you foresee economic developments in the coming years?<\/p>\n
A: If Habibie regains power next year and continues with his
\ncurrent policies he will in all likelihood fail to improve the
\neconomy.<\/p>\n
Habibie has sent out conflicting signals. For example, he said
\nhe would eradicate corruption, collusion and nepotism but he has
\nnot introduced any legislation to achieve this end. Abolishing
\nsuch practices is very important because they are merely the tip
\nof an iceberg of structural problems that include a poor
\nbureaucratic system, an excessively close relationship between
\nthe government and business, and the societal role played by the
\nmilitary. These structural problems drove Indonesia into the
\ncurrent crisis. (riz)<\/p>",
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