Stronger rupiah masks a dangerous economic paradox<\/p>\n
The rupiah is strengthening in value despite deterioration in
\nthe Indonesian economy. Economist Kwik Kian Gie discusses the
\nparadox inherent in the recent performance of the currency.<\/p>\n
JAKARTA (JP): The rupiah strengthened to Rp 7,600 against the
\nU.S. dollar in late October. Although it has since fallen back to
\naround Rp 8,000, it is still trading well above the conversion
\nrate of Rp 10,000 to the dollar set as a year-end target by the
\nInternational Monetary Fund (IMF).<\/p>\n
In some circles, the word is that Indonesia's monetary crisis
\nis over, that the rupiah has bottomed out and that the Indonesian
\neconomy is now therefore ready to recover. Even the Nov. 4
\nmeeting of Cabinet ministers responsible for the economy was full
\nof optimism.<\/p>\n
Coordinating Minister for Economy, Finance and Industry
\nGinandjar Kartasasmita said after the meeting that the recent
\ndecline in the rupiah's value was temporary and that it was
\nlikely to strengthen again after the Nov. 10 to Nov. 13 Special
\nSession of the People's Consultative Assembly (MPR) is over. Bank
\nIndonesia Governor Syahril Sabirin also said the central bank
\nwould continue to release an adequate supply of U.S. dollars onto
\nthe market.<\/p>\n
A strengthening in the rupiah is expected to restore foreign
\ninvestor confidence in the Indonesian economy and encourage them
\nto return to the country, capital in tow.<\/p>\n
But do these developments in the rupiah's exchange rate
\nindicate that President B.J. Habibie's Cabinet has succeed in
\nsetting the economy to right during its first five-months in
\noffice? It does not seem so.<\/p>\n
The increase in the value of the rupiah was not supported by
\nan improvement in the fundamental factors of the economy, which
\ninstead deteriorated at the same time.<\/p>\n
Deterioration in the economy has forced banks to raise deposit
\nrates to around 60 percent per annum, a level alluring enough to
\nencourage dollar holders to deposit their money in the country.
\nBy depositing Rp 800 million (US$100,000) in a bank offering an
\nannual interest rate of 50 percent, for example, an investor,
\nwithin one year, will earn Rp 400 million or $50,000, 10 times
\nmore than the $5,000 he would earn by depositing his money in
\ndollars at an interest rate of 5 percent per annum.<\/p>\n
Thus, high interest rates have helped to increase demand for
\nthe rupiah and propped up its value.<\/p>\n
However, does an interest rate of 50 percent per annum
\nindicate a healthy economy? Surely not and therein lies the
\nparadox of the rupiah -- its value has increased while the
\neconomy is deteriorating.<\/p>\n
Another factor propping up the rupiah is the fact that the
\ngovernment does not own an adequate amount of the currency to
\nfinance its own expenditure. For example, to subsidize food
\nsupplies and finance routine expenditures, the government has
\nbeen forced to take out dollar-denominated loans from overseas
\ncreditors and spend them in rupiah.<\/p>\n
By selling dollars, the government has increased the dollar
\nsupply on the money market which has a beneficial effect on the
\nrupiah.<\/p>\n
Thus, deterioration in the economy has forced the government
\nto seek foreign aid, the spending of which is propping up the
\nvalue of the rupiah. It's a paradox.<\/p>\n
Besides those factors, the increase in the value of the rupiah
\nhas also been helped by an external factor -- a weakening in the
\ndollar's value against other major currencies.<\/p>\n
Deterioration in the economy will increase the burden on the
\nnext generation of this nation. They will have to work hard to
\nearn money to repay the debts belonging to this generation of the
\ncountry's leaders.<\/p>\n
The government's outstanding foreign debt, which stood at
\naround $53 billion before the start of the monetary crisis in
\nJuly 1997, will be increased substantially by disbursement of the
\n$43 billion bail-out fund made available by creditors coordinated
\nby the IMF, the $8 billion advanced by the Consultative Group on
\nIndonesia (CGI) and a further $6 billion in humanitarian aid
\nadvanced by various donor countries and organizations. Added to
\nthe private sector's foreign debts of $80 billion, Indonesia's
\noffshore borrowing will reach $190 billion, or Rp 1,520 trillion,
\na staggering 3.6 times higher than the country's gross domestic
\nproduct (GDP) prior to the economic crisis.<\/p>\n
Deterioration in the economy has also been marked by an
\nincrease in bad loans, which are now thought to be larger than
\nthe country's GDP. A solution to this problem is still a long way
\noff because it must be related to a scheme designed to recover
\nmore than Rp 140 trillion Bank Indonesia advanced as liquidity
\nsupport to struggling commercial banks. The government, which
\nlast month gave indebted banks one year to repay their loans, is
\nnow considering making changes to the repayment scheme.<\/p>\n
Can the rot be stopped? The economy will improve if political
\nstability returns to the country, but this can only be achieved
\nif the People's Consultative Assembly (MPR) and the House of
\nRepresentatives (DPR) are populated by members who are truly
\nrepresentative of the nation and who are capable of appointing a
\nlegitimate government with the broad support of the public.<\/p>\n
If this does not happen, rioting will return to the country
\nwith all the usual detrimental effects on economic activity.<\/p>\n
The Special Session running from Tuesday to Friday provides
\nmembers of the MPR, who themselves were illegitimately appointed
\nin 1997, with a chance to approve policies which will pave the
\nway to democracy and satisfy the aspirations of the people. If
\nthey fail to do so, Indonesia will enter a gloomy era of anarchy
\nshortly after the session closes. Individual elements of society
\nwill start to issue unilateral demands for their own individual
\nrights to be met and take the law into their own hands to ensure
\nthis comes about.<\/p>",
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