The 43-billion-dollar question

Economist Kwik Kian Gie discusses the reasons why the rupiah remains weak even after last week's announcement of a massive reform package agreed by the government and the International Monetary Fund.

JAKARTA (JP): There are many reasons why the rupiah has remained weak against the dollar even after the signing of a massive reform agreement between IMF Managing Director Michel Camdessus by President Soeharto.

Of significant importance is that the 50-point reform memorandum does not explain how the $43 billion organized by the IMF to support the rupiah will be used. There is also no mention as to how the private sector's debts, totaling more than $65 billion, will be reduced.

The situation is aggravated by the fact that many people are converting their rupiah into dollars out of fear that either their deposits might be blocked and replaced by government bonds or else the government might reintroduce foreign exchange controls. Either situation would result in a gradual flight of capital out of the country.

Projections of zero growth, 20 percent inflation, company closures and soaring unemployment have prompted wealthy people to horde dollars ahead of a possible flight to other countries.

Even though the revision of the draft state budget for 1998/1999 will be based on an assumption that the dollar's value will average Rp 5,000, instead of the original projection of Rp 4,000, the rupiah has continued weakening to a level of more than Rp 9,000. This will mean that factories will have to increase their spending to procure imported materials by an average of 80 percent. Because they will find it difficult to raise their selling prices by 80 percent, some will stop operations and dismiss workers, thereby increasing unemployment levels.

Many borrowers will have problems repaying their debts to commercial banks. As a result, banks are likely to find it difficult to repay depositors' savings when their maturity is due. If such a scenario unfolds, depositors will move their savings from domestic to foreign banks and the central bank might have to inject trillions of rupiah into domestic banks to prevent their closure.

There has also been no mention of how the rupiah might be shored up in the short term. The memorandum does not explain whether the $43 billion aid will be used to support the rupiah.

But the IMF predicts that Indonesia, which usually runs a current account deficit, will enjoy a surplus in 1999.

In some people's eyes the letter of intent signed created an impression that the IMF merely wants to take over Indonesia's sovereignty while overcoming the economic crisis without distributing any money. This has been reinforced by the assigning of an IMF executive to the Economic and Monetary Resilience Council, a committee newly established to oversee the implementation of the reform program which President Soeharto himself is to chair.

So, will the massive reform program be useless? In the long term, it will be useful if it is implemented consistently. Measures similar to those recommended by the IMF have long been proposed by Indonesian experts but the political elite had never listened. They pay attention to the IMF's suggestions however because they come with a lot of money.

But if there is no clear explanation about the planned utilization of the aid, we suspect that the IMF might not have any plans to disburse the $43 billion but merely wants Indonesia to achieve a current account surplus in 1999 at the costs of the extraordinary suffering of its people -- which may also include social unrest.

If such suspicions are true, the IMF's involvement will cause deep concern because Indonesia will be seen as being dictated to by a foreign party. Moreover, the ownership of good domestic companies may have to be transferred to foreign investors.

I suggested some time ago that the government should seek assistance from the IMF. Because of that, I now feel called to disclose that the IMF, in providing its assistance, is seeking benefits of its own. Indonesia is an IMF member which has the right to assistance -- not charity -- whenever it is facing difficulties.

I must admit that economist Rizal Ramli was right when he said that I was starting to doubt the merits of the IMF's intervention.

What should we do then? Let us wait and closely monitor what the IMF does to our country. If necessary, we can say: "Go to hell with the IMF" and take Malaysian Prime Minister Mahathir Mohamad's attitude of avoiding resorting to IMF assistance.

Many people suspect that because the technocrats in the cabinet were scared to talk frankly to the President about Indonesia's economic problems, they collaborated with the IMF, which then pressed the President to accept its insulting proposals.

Many people have told me that they were sad to see Camdessus standing with his arms folded as he witnessed the President sign the agreement imposing hardships on Indonesians but offering no significant assistance from the IMF. That gave a distinct impression that the President had "lost a battle".