The crisis deepens

The rupiah predictably plunged past 11,000 to the U.S. dollar on Monday morning before closing slightly up at 10,700. It dragged down the composite price index of the Jakarta Stock Exchange (JSX) to 396.611, below the psychologically important 400 point level, and a 4.2 percent fall from Friday's close.

The absence of any new positive factors to offset the sequence of bad news that has been accumulating since the February censure of President Abdurrahman Wahid by the House of Representatives has further incited panic selling of even blue-chip stocks and prompted faster dumping of the local unit.

The further steep depreciation of the rupiah is certainly affecting the outlook of most industrial companies listed on the JSX due to their high dependence on imported materials and components and heavy foreign debt burdens. The plunging rupiah may also dampen consumer confidence and consequently curb private consumption, thus far one of the main locomotives of the nascent economic recovery.

Amid the festering political uncertainty that seems to have turned into a game of brinkmanship between the legislative Assembly and the President, plus sporadic bouts of civil unrest and stalled negotiations with the International Monetary Fund (IMF), not a single economic measure appears to matter anymore. Bank Indonesia's Senior Deputy Governor Anwar Nasution, despite appearing desperate and helpless, was right to observe that intervening in the currency market by selling dollars would be like pouring water into the desert.

With a total foreign debt of US$140 billion, of which $26.5 billion matures this year, Bank Indonesia, which holds only about $29.1 billion in gross foreign reserves, is certainly impotent to influence the demand-supply equation in the market. This is mainly because the rupiah's fall is caused by demand not for real transactions (imports and foreign debt servicing) but primarily for speculative or hedging purposes.

The further jacking-up of interest rates could slightly curb, but not stop, the rush for the dollar, and the impact of such a tighter grip on credit might severely devastate the weak banking industry and could choke economic activities.

Forcing exporters to repatriate their export earnings in order to increase the dollar supply within the domestic banking system, as some analysts and bankers have suggested, would most likely be futile from the outset in view of the complex administrative systems required. Companies might simply underinvoice their export prices and overinvoice their import costs in an attempt to circumvent such regulations.

Imposing direct foreign exchange controls, as Malaysia did in 1998, would not only be suicidal at present. Such a drastic measure might totally break Indonesia's already prickly relations with the IMF.

Government economists might argue vehemently that the rupiah exchange rate is now grossly undervalued, compared with the economic fundamentals. But economic fundamentals certainly do not count for much when the system of law enforcement and public order is breaking down as at present in many parts of the country. In the perception of the international market the economy of the country is now so degraded as to have become virtually a "basket case".

The government's decision on Monday to postpone from April to October the average 20 percent rise in fuel prices might be effective in dousing a possible new conflagration leading to massive protest demonstrations. However, its move to raise fuel prices in April for large industrial consumers by between 50 percent and 100 percent might threaten not only the budding economic recovery. It could create a new loophole for corruption and smuggling.

One can hardly imagine how the state oil and natural gas company, the corruption-infested Pertamina, would be able to administer such a two-tier price system in a vast archipelagic country like Indonesia. But that seems to be the "least worst" of the alternatives the embattled Abdurrahman administration could take now, even though it is at the risk of creating new economic distortions and further inflating the state budget deficit.

It is therefore almost impossible to predict how much further the JSX index could crumble or the rupiah might fall in the coming days. We can only hope that Abdurrahman and the House leaders will immediately stop their bickering, put aside their power ambitions and start acting and working together to save the nation from plunging into an even deeper crisis.