A chance for Indonesia

A chance for Indonesia

The markets have waited for months to see which way the cat
will jump in Indonesia. Opportunities were frittered away and the
situation today is now worse that it was two months ago. Still,
it is not too late to reverse the country's downward spiral, if
the correct policies are adopted immediately. For the first time
in months, that now seems possible. Realizing that recovery
cannot be erected on a policy of drift, President Soeharto's new
government has abandoned the will-o'-the-wisp currency board, and
has resumed serious negotiations with the International Monetary
Fund. The IMF, for its part, seems to have decided on a more
focused approach, which is just as well. All aspects of its
previous 50-point reform program remain relevant, but they are
not all equally urgent. First, the Fund should resuscitate the
patient; then, it can attack the root causes of the disease -- in
this case, an obviously sclerotic economic system whose arteries
need to be flushed out and cleansed of cronies. But if the sum of
things is to be saved, if 200 million people are not to sink like
a seven-stone weight into the ocean, emergency procedures should
concentrate on what is immediately necessary. It is no secret
what these are.

First and foremost, the country's banking system needs to be
saved. The crisis is in essence a banking crisis, and growth
cannot resume if the banking system is not set straight. Measures
to do so should include recapitalizing banks through an infusion
of government funds, aid from agencies like the World Bank, and
foreign direct investments; the consolidation of neophyte banks
into stronger ones, and a strengthening of banking regulations.
Symbolic actions such as the IMF ordering the closure of 16 banks
to signal resolve, as it did at the outset of the crisis, and
acknowledging now that the move was a mistake, will no longer
suffice.

Second, massive private foreign debts have to be restructured.
As the South Korean experience indicates, the rupiah will not
stabilize so long as this problem remains unresolved. The IMF has
little leverage over lenders, but it can still facilitate the
process of rescheduling loans. Foreign governments must also get
involved, as the U.S. government did in resolving South Korea's
short-term debts. Since Japanese banks hold a substantial portion
of the outstanding loans to Indonesian corporations, the Japanese
government ought to take the lead in this instance.

Third, trade financing has to be restored. Letters of credit
(L/Cs) issued by Indonesian banks are not being honored because
most overseas banks have stopped rupiah transactions. Besides
restricting the ability of its exporters to manufacture goods for
lack of inputs, the difficulty of obtaining L/Cs has also stymied
the import of necessities and has left Indonesia vulnerable to
hyper-inflation. The Australian government proposal to provide
food aid will help to relieve the attendant human suffering, but
will not solve the problem in the long-run. Only the Singapore
government's proposal of a scheme to guarantee L/Cs will work.
International attention should be re-focused on this idea.

Needless to say, none of the above is possible if the
Indonesian government does not get its act together. A few more
months of family ueber alles will result in collapse. This is its
third chance. It had better grasp it. It is likely to be the
last.

-- The Straits Times, Singapore