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.