Desperate move
Desperate move
Bank Indonesia (BI) raised its benchmark interest rates across
the board again to as high as 58 percent last Thursday in another
concerted bid to rebuild confidence in the rupiah and to curb
inflation, which has exceeded 33 percent in the last four months
alone. It is a desperate move to cope with a desperate economic
situation which has seen the rupiah collapse again to almost
10,000 against the U.S. dollar, its lowest rate since mid-March.
The rate stood at 2,450 last July.
While the measure will surely precipitate more business
failures with massive worker layoffs and may drive more banks
into insolvency, its positive impact on the rupiah remains in
doubt since the economic crisis has been exacerbated by a
political crisis which is eroding the legitimacy of the
government. In fact, the risks of more social unrests and
political instability have now become the primary determinant of
the rupiah's rate.
The rupiah had started stabilizing at a range of 7,800 to
8,000 against the dollar from as low as the 17,000 mark in
January after the central bank first increased its certificate
rates on March 21. The currency strengthened again at a higher
band of 7,750 to 7,900 immediately after BI's second rate
increase to as high as 50 percent on April 21.
Had it not been for the recent social riots and massive
looting in the North Sumatra capital of Medan and its surrounding
towns in the first three days of last week, the rupiah should
have strengthened significantly after the country received a
strong vote of confidence from the International Monetary Fund's
(IMF) executive board early last week.
The IMF's board of directors unanimously concluded at its May
4 evaluation meeting in Washington that Indonesia had fully met
reform targets set for that period. This acknowledged an
impressive performance after the government's previous
backslidings on both its Nov. 5, 1997 and Jan. 15, 1998 reform
agreements with the IMF.
The IMF decision to release its second US$3 billion tranche --
though in three monthly installments instead of a lump sum as its
first $3 billion tranche was disbursed in November -- should have
reinvigorated market confidence in the government's commitment to
reform. The IMF move will also soon unlock $6 billion in loans
from the World Bank, the Asian Development Bank and several other
country donors participating in the $43 billion bailout fund for
Indonesia established in early November. But the rupiah remains
vulnerable.
This anomaly is bringing home the warnings -- made repeatedly
by analysts, politicians, intellectuals, students and the mass
media over the last few months but stubbornly rejected by the
political leadership -- that economic measures alone, though
necessary, are no longer enough to cope with the crisis.
BI Governor Sjahril Sabirin himself conceded when announcing
the rate increase that the measure in and of itself was not
enough to beef up the rupiah because the economic crisis had been
complicated by what he called noneconomic factors. But Sjahril
remains convinced that the interest rate policy is the most
effective instrument in the central bank's arsenal to prevent the
rupiah from further spiraling downward. The April 21 rate
increase, for example, succeeded in generating $1.78 billion in
capital inflows through foreign purchases of BI's certificates.
Fears nevertheless are rising over the perception that a slow,
lukewarm response by the national leadership to the increasing
demand for political reform would only make people more restless
and increasingly impatient over current economic hardships. Since
the people's sufferings will likely increase before the economy
begins to stabilize, tempers could easily flare and explode into
nation-wide violence.
The massive riots in North Sumatra could be a last warning to
the government to act quickly, firmly and consistently in
addressing the demands for political reform to establish good
governance. Without solving the fundamental political issues of
the crisis, the government's painful reform measures, including
last week's fuel and electricity price increases, will not bring
the rupiah to a level strong enough to stop the country's
economic bleeding.