Germany is a reliable partner for development and reform
Germany is a reliable partner for development and reform
By Theo Waigel
JAKARTA (JP): My visit to Jakarta takes place at a time of
great difficulty for Indonesia and for its people. I have come
here with a twofold purpose: to make a personal assessment of the
state of the economy, and to assure Indonesia of Germany's
friendship and support. Federal Chancellor Kohl has been
following developments attentively and has spoken repeatedly to
President Soeharto by telephone. Besides this, he dispatched a
personal representative to Jakarta in mid-January with a team of
consultants to find out where German help can most effectively be
given in order to promote the process of economic reform. In the
course of my talks in Jakarta, I shall set out in greater detail
the assistance Germany has to offer, which will consist, in the
most part, of a loan program for small and medium-sized
businesses and technical support in the field of banking
supervision and central bank legislation. This support is
Germany's bilateral contribution to overcoming Indonesia's
current economic problems. But the success of the reforms will of
course ultimately depend on Indonesia's own resolve to see them
through, and on its readiness to cooperate with the international
community in overcoming the crisis.
The currency crisis emanating from Thailand in the summer of
last year spread to other East Asian countries in succession. The
causes were many and varied. An excessively rigid exchange policy
(essentially pegging to the U.S. dollar) undermined the capacity
to compete in international markets, generating rising current
account deficits and leading to large and often short-term
capital inflows not funding productive investment alone and
helping to create a speculative bubble. The fall in exports that
set in during 1996 exposed existing structural deficits in the
affected countries; overstrained banking and financial sectors
with a substantial volume of non-performing loans, aggravated by
shortcomings in banking and financial market regulation and
supervision, and a large stock of debt in foreign currencies,
much of it short term.
All observers were also taken aback by the depth of the
currency crisis, especially in Indonesia, which has registered
notable economic and social achievements in the past decades in
close cooperation with the World Bank and the International
Monetary Fund. In making the fight against poverty, a central
element of its development policy concept, Indonesia has become a
model for other developing economies. But even if the depth of
the crisis was not foreseen, there were indications of
undesirable macroeconomic trends. For some time the IMF had been
stressing the need for a more flexible exchange rate regime,
though this advice regrettable went unheeded.
The currency crisis provoked a rapid response from the
international community under the leadership of the IMF, and
financial aid packages of unprecedented size were provided. From
the outset, Germany supported these aid packages, which were
accompanied by comprehensive adjustment programs in the affected
countries. But the burden of adjustment must be shared equitably
between the public and private sectors. We have therefore placed
particular emphasis on the inclusion of foreign commercial banks,
since the debt of the domestic private sector in relation to
these banks is a fundamental problem in all affected countries.
Hence foreign commercial banks must also play a part in helping
to master the crisis. Korea's agreement with foreign creditor
banks on the conversion of short-term debt of up to US$24 billion
is a decisive step towards renewing confidence in the Korean
economy. Indonesia will use the temporary suspension of debt
repayments announced in late January to achieve a solution to the
problem of private foreign debt in direct negotiations between
Indonesian enterprises and creditor banks. I have assurances from
German banks that they will take an active and constructive role,
as in the case of Korea, in helping to solve the problem. At the
meeting of G7 finance ministers at the end of this week in
London, I will also request the support of my colleagues in this
matter.
A solution to the problem of Indonesia's private-sector
foreign debt is urgently needed, so that the country can finance
the imports it needs as the basis for its own export trade. So
from the outset, I have urged that German export credit
guarantees should remain available for exports to Indonesia. Last
year, the German government gave guarantees of more than DM 2
billion for supplies to Indonesia alone. Besides this, it is now
of crucial significance for the Indonesian economy to regenerate
the domestic circular flow of money, which had virtually come to
a standstill in January. The guarantees for all deposits
announced by Bank Indonesia in late January can help to reinstate
lending to business enterprises.
Since President Soeharto personally signed the adjustment
program agreed with the IMF, the Indonesian authorities have made
impressive progress on reforms. It is now important that the
pressure should be kept up and that reforms should continue to be
resolutely pursued. The markets keep a close watch on the action
taken by economic policy-makers. If they are convinced that
Indonesia is implementing the reform program in full and
according to schedule, investors will regain confidence and the
rupiah rate will be stabilized.
Some criticism has been voiced in past weeks regarding the
reform program agreed with the IMF. I feel that the program is
adequate and, and in terms of content, has no alternative. In a
phase of adjustment, reforms will always impose temporary
hardship. But especially in the case of Indonesia, account has
been taken of the social needs of the poorer sections of the
population. Thus the BULOG monopoly for rice and the subsidies
for kerosene have been retained. In addition, the program agreed
with the IMF provides for increased spending on basic medical
treatment and education and on special projects for village
development. The World Bank too, has announced aid to lessen the
social hardship caused by the reform process. Finally, German
assistance is also geared in particular to small and medium-sized
businesses. If the reform program is successfully carried
through, Indonesia will be able to follow on, in a relatively
short time, form its past economic and social achievements.
Dr. Theo Waigel is German Federal Minister of Finance. He has
written this article in connection with his visit to Indonesia
which officially begins today.