The 43-billion-dollar question

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".