Washington Times, April 9, 1998
JAKARTA, Indonesia – President Suharto’s government bowed for the third time in six months yesterday to demands for economic reform, telling a skeptical International Monetary Fund there will be none of the backsliding that ruined previous agreements.
“This time there is a very strong, not only commitment, but instruction from the president, that all agreements should be honored to the letter,” Indonesia’s top financial official said after the signing of a deal to secure $40 billion in loans.
Indonesia failed to live up to the terms of two previous versions of the bailout package, first signed in October and then revised in January. Each time, the government began backpedaling on the IMF-mandated reforms almost as soon as the ink was dry.
Yesterday’s agreement, which got a tepid response from financial markets, eases requirements that Indonesia abolish subsidies for essential foods and fuel in light of food riots and growing poverty and unemployment.
But it speeds up reform of the country’s failing financial system and for the first time sets up a framework for Indonesia to help corporations repay $74 billion in loans they took out from overseas banks. Full details were not expected before today.
Both sides said the agreement called for close monitoring by the IMF to ensure compliance.
The next $3 billion payment will not be released for at least two weeks, giving Indonesia time to take “substantive action” on the program before the agreement is submitted to the IMF’s executive board, according to an IMF statement.
IMF Deputy Managing Director Stanley Fischer, speaking in Tokyo, said, “We have measures in place and if they are not implemented, the program won’t go ahead. We have no assurance. We cannot have assurance, given history, that it will be done.”
Previous deals fell apart over the government’s reluctance to dismantle the country’s cartels and monopolies and over its attempt to implement controversial measures such as a plan to peg the rupiah to the dollar.
Top economic minister Ginandjar Kartasasmita acknowledged misunderstandings over various “quick-fix” solutions but said the government was now committed to take the prescribed measures.
The Associated Press said those include the privatization of 12 state enterprises including telecommunications, mining and cement companies and the breakup of other monopolies that have made some of President Suharto’s family and friends very wealthy.
However, Suharto got much of what he wanted. Indonesia will be allowed to continue subsidies on rice and soybeans – staples of the local diet – and only gradually raise prices on fuel and power.
“The IMF realizes that there needs to be these subsidies,” Mr. Ginandjar said. “They don’t want to make the poor people suffer more as we implement these reforms.”
Almost 10 million Indonesians have lost their jobs since the crisis began, and the government predicts the number could double. The country has already been shaken by sporadic food riots, and there are widespread fears that soaring prices sparked by the removal of subsidies could spark widespread social unrest.
The agreement did little to bolster Indonesia’s troubled financial markets, which awaited the release of further details today. The rupiah remained stable at 8,425 to the dollar, while Jakarta’s stock index rose 0.74 percent to 530 points.
The IMF will get involved in helping Indonesia resolve its crippling $74 billion in corporate debt. Mr. Ginandjar said the government will guarantee corporate access to foreign exchange and ask offshore debtors to roll over the loans.
The rupiah’s 70 percent loss in value since last July has left all but a handful of the country’s largest companies technically bankrupt.
The deal came two days after the government announced the suspension of seven ailing banks and the takeover of seven others, including the country’s second-largest private bank, by a new government agency. Bank reform is on the top of the IMF’s reform list.
Despite government assurances, for the past few days thousands of frantic customers have jammed branches of the affected banks to close their accounts.
“Such measures will rock public confidence because people are now becoming more aware that the banking industry is seriously flawed,” economist Kwik Kian Gie wrote in the Jakarta Post.
The new agreement includes revised economic figures. Analysts widely dismissed the previous numbers as wildly unrealistic. The Indonesian minister predicted the economy would contract by 4 percent vs. no reduction in January and estimated a budget deficit of 3.2 percent with inflation at 17 percent.
That contradicts the government’s own figures, released last week, which showed inflation is now running at almost 50 percent a year.
Local critics remained skeptical that the Suharto government will follow through on any reform package.
“A change in the political regime is the first, best policy to revive confidence that reforms will be implemented seriously,” Mari Pangestu, head of the Center for Strategic and International Studies, said at a seminar
Photo, An Indonesian carries sacks of rice in Jakarta. Under the new IMF plan the government will keep subsidizing food staples rice and soybeans., By Reuters
Credit: THE WASHINGTON TIMES
Copyright Washington Times Library Apr 9, 1998