A thorough reform with IMF help needed

The rupiah took a big tumble day after day last week, setting all-time lows each time, as the monetary crisis continued unabated. Economist Kwik Kian Gie gave his opinion in the following question and answer.

Question: The rupiah plunged to Rp 3,600 to the dollar on Friday. Does this surprise you?

Kwik Kian Gie: Not really. When the crisis started on Aug. 14, I wasn't the least surprised.

Q: How's that?

A: I wrote in Kompas on June 2 expressing my deep apprehension. I had a graph showing that Indonesia's current account deficits caused the four devaluations, and the "Sumarlin Crunch". The current account deficit had been rising since 1995, and nothing had happened. That's why I wasn't surprised. Of course I couldn't have predicted when it (the crisis) would occur.

Q: Why has the currency now plunged to Rp 3,600?

A: It's not surprising given the underlying factors. It wasn't because Rp 3,000/dollar wasn't a realistic purchasing power parity, but it was because demand for the dollar exceeded supply.

Q: Could you explain this?

A: There was a surge in demand for dollar because import exceeded the dollar value of export.

The private sector needs dollars to repay its US$60 billion dollar debts. If their repayment schedule is spread out equally through the year, it needs $5 billion each month. There is not enough supply because roll-over facilities and funding from banks to cover interests and debts are virtually nonexistent.

The government, with a debt of about $50 billion, needs $8 billion this year in repayments and interest. But it only received $5 billion from the Consultative Group on Indonesia (CGI).

Foreign investors are a funny lot. They were once so confident that the fundamentals of the Indonesian economy were solid and good, and they were praiseworthy of the Indonesian miracle. Now they have turned very negative. They are shocked and upset that so many companies have defaulted. Many banks which endorsed commercial papers have not been able to meet their obligations. Foreign capital inflow has stopped completely.

Q: But foreign exchange reserves are rising. Why is that?

A: That was caused by a surge in foreign capital inflow. Foreign capital has long shored up reserves. Now it has stopped. But imports cannot stop immediately, and exports have slowed down.

Q: Shouldn't a weak rupiah lead to more exports because Indonesian products are now cheaper?

A: Yes, but only temporarily. The import content of our exports is very high. Imported machinery and raw materials make up for a large part of costs. There is very little added value. You can see in the accompanying graph that in the past, current account deficits began rising again after each devaluation.

Q: But exports have risen?

A: Yes. Usually, an increase in exports leads to greater supply of foreign currencies, and the rupiah should therefore be strong. But rupiah has continued to slide. In 1971, the rupiah was Rp 378/dollar and now it is Rp 3,600. Take Thailand whose currency was stable at 20 baht to the dollar for decades. In the last 40 years, its value has fallen from 20 to 36.55 baht. This means Indonesia's exports virtually have no added value, while imports, including goods and services and interest payments, are high.

Q: What is the solution?

A: I don't think we can resolve this by ourselves. We should turn to a consortium involving the World Bank, the IMF and the CGI.

Besides a dollar injection, such assistance would also have an important psychological factor. The government has lost all credibility because people feel that an umbrella which had been provided by the government has disappeared. The government widened the rupiah's intervention band eight times before abandoning the policy on Aug. 14. People feel they have been deceived by the government's tough talking. When intervention was most needed, the government decided to abandon it. The government provided the umbrella when it was not raining. But when it started to rain, the umbrella was removed.

In the old days, the government repeatedly said it would not devalue the rupiah and then it devalued it nevertheless. Confidence had since been restored. The currency depreciated at (a predictable) 5 percent each year, and there was the umbrella protection through the intervention band. But this turned out to be false again. That's why it has lost all credibility.

We need to borrow the credibility of the World Bank, the IMF and the CGI, at least until calm is restored and a psychological condition permits.

Q: Wouldn't the IMF demand a thorough reform package, and wouldn't this be humiliating?

A: A thorough reform is just what Indonesia needs.

I don't think we should feel humiliated. We have been dependent on the IGGI/CGI and the World Bank for 30 years. There is absolutely nothing wrong in rounding up for more help given the crisis in hand. After that, we would fight to clean up the dirt in our corporate and banking sectors while striving for clean, lean and good governance. We should strive to become self- reliant to remedy the humiliation, if there was any.

I don't feel humiliated, because we're facing moral degradation, corruption, collusion and nepotism. All of these lie at the root of our economic plight, and one by one they're starting to rear their ugly heads.