A thorough reform with IMF help needed

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.