Shot in the arm

Shot in the arm

Seen from a foreign reserve position, the almost US$8 billion
in new loans pledged by Indonesia's government and multilateral
creditors in Paris on Thursday is certainly a shot in the arm for
the gradual strengthening of the rupiah, especially because
almost all the new credits are quick-disbursing. Added to the $6
billion to be disbursed from the $47 billion International
Monetary Fund-sponsored bailout fund, there will indeed be bumper
sums of dollars rolling in to beef up the beleaguered rupiah
within the next eight months.

Though $4 billion of the total will be used to amortize
foreign debts and another $8 billion to cover the State Budget
deficit for the current (1998/1999) fiscal year, the inflows will
still fuel massive purchases of rupiah by the central bank by
pumping dollars into the market. These developments could jump-
start the stabilization process of the rupiah to eventually
strengthen it to the target of 10,600 against the dollar by
March, from a range of 13,700-14,000 over the last few days.

A stable rupiah at a reasonable rate is by itself crucial for
the economy to get out of the crisis as it will remove many of
the economic woes which have paralyzed thousands of industrial
firms, steeply raising the prices of basic staples and driving
thousands of companies, and consequently most banks, into either
financial distress or bankruptcy. Punitively high interest rates
choking business operations could then be lowered.

But the massive inflow of dollars through official aid will
not by itself be sufficient to sustain rupiah stability for a
long period of time. This is mainly because it does not fully
reflect restoration of market confidence in Indonesia's economy.
The official loans will not create a significant increase in
income-generating capacity to service larger foreign debts in the
future. The bulk of the $8 billion budget deficit envisaged for
this fiscal year will finance subsidies for basic staples and
social safety net programs and cover the shortfall in government
operating (routine) budget. The spending would only help avert
another wave of social unrest and reduce the suffering of the
estimated 90 million impoverished people without forcing the
government to print more money.

Without restoration of significant private capital inflow,
which will take place only along with market confidence, the
rupiah will likely sag again after March and equally large sums
of new official loans will again be required to plug another big
hole in next year's state budget.

The warning was clearly spelled out by World Bank Managing
Director Sven Sandstrom at the end of the annual meeting of the
Indonesian Consultative Group on Indonesia (CGI). Sandstrom
cautioned that an enduring commitment to the reforms on which the
government has embarked is required to sustain international
support and produce economic recovery.

There are several other equally urgent reform measures that
have to be completed to sustain the stabilization process of the
rupiah. First of all, the bank restructuring, already behind the
schedule agreed with the IMF, should be accelerated, otherwise
foreign trade financing flows will remain clogged, new lending to
corporations will not resume and exports, badly needed to
increase foreign reserves, will remain sluggish despite the
advantage generated by the weaker rate.

The restructuring of the $70 billion corporate and foreign
debt overhang, of which $32 billion is due this year, should be
implemented under the Frankfurt agreement on schedule to cut the
pressure on the rupiah and restore foreign confidence in the
corporate sector.

The lack of market confidence in the Habibie administration,
which is another big hurdle to rupiah stability, must be
addressed. This requires more concerted, consistent efforts to
develop good governance -- a system of public administration that
is effective, accountable and transparent, and able to enforce
laws with a strong, independent and effective judicial system and
maintain security.

Moreover, only good governance will enable the Habibie
administration to effectively manage the aggregate demand through
high fiscal discipline, which is crucial for stabilizing the
rupiah rate and checking inflation but demands more sacrifices
from the people. Only credible government will be able to gain
the public's cooperation for enduring more painful measures, such
as gradual reduction of subsidies, which are needed to stabilize
and eventually restore the economy to respectable growth.