The rupiah recovery

The string of good news since early August seems to have ignited the beginning of the long-awaited recovery of the rupiah, pushing it into a range of between Rp 10,800 and Rp 11,000 against the American dollar for the past eight weeks. Still more encouraging was the fact that the market seemed to shrug off the series of isolated riots in several towns over the same period. The currency remained fairly stable in its newfound range, except briefly on Sept. 8 and Sept. 9, when it returned to below Rp 12,000 in reaction to a short-lived renewal of massive student demonstrations in Jakarta and Surabaya.

The latest good news on the economy broke last Friday, when the International Monetary Fund (IMF) approved the release of a further $1 billion from its $11.3 billion bail-out fund for the country. Furthermore, there are strong indications that the government's adherence to the IMF program of reform could result in a resumption of a quarterly issue of $3 billion after the next two monthly installments are disbursed on Oct. 25 and Nov. 25. The IMF initially planned to release the loans on a quarterly basis over a three year period ending in the year 2000 before doubts emerged over the government's willingness to implement the reform program and widespread social unrest here lead to a change of heart.

One week earlier, Paris Club creditors agreed to reschedule $4.2 billion of government debt repayments that would otherwise have fallen due within the next 20 months. This followed an impressive breakthrough resulting from the finance ministry's efforts to recover the bulk of the Rp 140 trillion issued as emergency liquidity support to ailing commercial banks by Bank Indonesia.

The big question nonetheless, given the false dawns which have intermittently raised hopes of a recovery in the rupiah since February, is whether or not the latest rally in the currency markets is sustainable in nature and capable of driving the rupiah on towards the year-end target of Rp 10,000 against the dollar. Although this modest rate would still be 76 percent lower than the rupiah's pre-crisis level of Rp 2,400 against the dollar, it would still be considerably better than the depths which the currency plumbed in May, when it was briefly worth 85 percent less against the dollar than it was before the crisis.

A stable rupiah is critical for the economy, because it is a prerequisite for a cut in the punitively high interest rates of over 65 percent which have sent our economy into hibernation. The longer these interest rates are allowed to choke the economy, the greater the number of bad bank loans there will be. This will compound the difficulties of our ailing banks, which in turn will filter through into the corporate sector, leading to more and more bankruptcies and inflicting yet greater damage to the fundamentals of the economy.

No one seems to doubt the government's determination to bring about economic reform, as agreed with the IMF, and to pursue economic management with common sense as its guiding principle. That is all well and good, but most of the destabilizing factors that have the potential to abort the rupiah's recovery, even as it is beginning, lie in the social and political fields. As long as the market remains apprehensive and therefore susceptible to social and political instability, the recovery will remain on shaky ground. Market jitters on the rupiah are related mostly to the high risk of renewed social unrest and massive student demonstrations.

Fortunately, though, it is within the government's ability to control these potentially damaging factors. First of all, the risk of renewed social unrest on a massive scale could be minimized if the government made improvements to the way in which subsidized staple foods and other essential commodities are distributed.

As regards political risks, the immediate test facing the government is how to resolve the controversy it has built up around the plans of the Indonesian Democratic Party (PDI) faction loyal to Megawati Soekarnoputri to hold a congress in October. Failure to solve this potentially explosive problem could lead to an outpouring of frustration and anger on the urban streets of this country.

Yet another big test in the offing is how successful the government will be in channeling the general public's aspirations during the extraordinary session of the People's Consultative Assembly (MPR) which is to convene in the second week of November. Of equal importance is how it goes about trying to convince the general public that it is serious in its efforts to bring the corrupt, the collusive and the nepotistic elements of the previous government to justice, and more specifically, how it goes about dealing with former president Soeharto's perceived abuse of power to further the interests of his family and close cronies.

The recovery in the rupiah will be more durable if the government succeeds in fulfilling its main agenda, namely to enact new political laws capable of ensuring overall political reform and guaranteeing a fair, open and honest general election in the middle of next year.