Economy crippled

Economy crippled

Not a single economic measure, however sound it may be, seems
to matter anymore as Indonesia descends into near chaos and a
number of foreign governments contemplate evacuation of their
citizens from the country. President Soeharto's concession
yesterday to downwardly revise the price of fuel oils and
electricity, which were increased on May 5 to prevent the state
budget from running into an unmanageable deficit, will do very
little to lighten the burden on ordinary people. Furthermore, his
reiteration that Indonesia will adhere in full to reform measures
agreed with the International Monetary Fund will have little or
no stabilizing effect on the economy.

The 58 percent interest rate offered by the central bank on
promissory notes (SBIs) has been rendered ineffective as a means
of attracting foreign money to strengthen the rupiah. The rupiah
has instead fallen to below Rp 10,000 against the American
dollar, well below this year's target rate of Rp 6,000. The
punitively high interest rates, which have crippled business, now
seem irrelevant to the curing of our economic woes. This is
because of the prolonged period of turmoil, daily demonstrations,
rioting, massive looting, and the rampages in Jakarta and several
other provincial cities over the last few days. The trauma
inflicted by this breakdown of law and order, the high death
toll, and the huge material losses which have resulted have
compounded the recession.

The country is moving inexorably towards a black hole as more
and more worried entrepreneurs, both Chinese Indonesians and
foreign, move their capital out of the country, this despite the
painful reform measures which have been introduced. Until
stability is restored, no new money will flow in. Even the next
installment from the second tranche of IMF aid and assistance
from other multilateral agencies and country donors are now at
risk of further delay.

The riots are feeding fears on financial markets about the
general business climate in Indonesia. This bearish spiral is
turning in on itself. Every time the situation worsens, the
rupiah falls, causing the price of basic goods to rise, which in
turn inflames popular anger and leads to further unrest, and so
on. Real wages have fallen by more than 50 percent over the past
four months and hyper-inflation is taking hold of the economy.
Furthermore, a large number of workers who have not already lost
their jobs will do so over the next few months. Many will not be
able to feed their families. What a vicious circle.

Indonesian economics ministers have rightly conceded that they
are fighting a losing battle on the economic front if social and
political unrest continues to escalate. Coordinating Minister for
Economic and Financial Affairs Ginandjar Kartasasmita went as far
as to say in Tokyo on Wednesday that the government must respond
quickly and affirmatively to the student protests.

Ginandjar did not state so explicitly, but what he really
meant was that the key to economic stability had shifted to the
political field. Unless the government responds quickly and
adequately to demands for overall political reform being made by
students, intellectuals, professionals and politicians, none of
the IMF economic reforms will be of any consequence whatsoever.

But response from the political leadership has so far been
rather insignificant. What the national leadership has been
trying to do so far is to simply keep what it sees as
destabilizing forces at bay. This is not only exacerbating the
economic crisis and political instability, but is also increasing
the costs of the eventual and inevitable leadership succession,
now seen to be the only way out of the present national crisis.