The period of this Survey, from early October 1997 to early February 1998, was marked by a deepening financial crisis that began as a seemingly simple currency problem and was progressively aggravated by the extraordinary depreciation of the rupiah. On 22 January 1998 the currency fell to a record low of about Rp 17,000/$. This amounted to a devaluation of more than 80% since it was floated on 14 August 1997. To ordinary Indonesians, the rupiah's value seems to have fallen even moro dramatically-each dollar has become six times more expensive. The crisis has exposed the country's weak financial system and brought the economy to a halt. The stock market has collapsed, national banks are in serious trouble, and the international ratings of the larger banks have fallen below 'junk' status, while increasing numbers of local companies face bankruptcy. In the third quarter of 1997 economic growth slowed to 3.4% (on an annualised basis). This was significantly below the first semester's growth rate of 7.3%. Preliminary estimates suggest that in the fourth quarter of 1997 the country's economic growth rate was 0%. Prices increased by 6% in the last four months of the year alone, resulting in double-digit inflation for the whole year. In January 1998 they jumped by 6.9%, the highest monthly increase in 15 years, surpassing even the increase for the whole of 1996 (6.5%). Workers are being laid off in large numbers, especially from industrial and construction activity. In September and October, problems caused by the currency crisis were exacerbated by widespread forest fires that lasted for months, and by a prolonged El Nino-induced drought. The economic cost and the damage to public health and the natural environment are huge and their long-term implications unknown. During the latter part of the Survey period, efforts at resolving the financial crisis itself were complicated by the political transition, with the approach of the General Session of the People's Consultative Assembly (MPR) to elect the President and Vice President for a new five-year term. In an attempt to overcome the crisis the government sought the assistance of the International Monetary Fund (IMF), at an earlier stage than Thailand had done or Korea was to do. On 31 October 1997 Indonesia concluded an agreement with the IMF. Governments from a number of countries in the region also extended financial assistance, and a total financial package of $43 billion was made available to Indonesia in the form of standby loans.(1) With concerted intervention by Bank Indonesia (BI), the Bank of Japan and the Monetary Authority of Singapore, the rupiah strengthened and began to stabilise in early November, but this lasted only two weeks before the currency began a free fall as confidence was shattered. A new agreement was negotiated with the IMF and a much strengthened economic reform program was announced on 15 January 1998. The market again reacted negatively, unable to see a clear program to address either the problems that had brought the banking system to the brink of collapse, or private sector short-term external debt, which continued to exert strong downward pressure on the rupiah. The causes and depth of the crisis in Indonesia need to be explained. A careful analysis of the sequence of events suggests that it all began through a contagion effect from the crisis in Thailand, but that once the markets began to scrutinise the domestic economy they became aware of vulnerabilities and anomalies within it (Lindblad 1997). From then on things appear to have been mishandled, leading to a progressive deterioration of market and public confidence in the rupiah, and in the government's ability to handle the crisis. The political uncertainties surrounding the succession added to the collapse in confidence. Following the dramatic fall in the rupiah on 22 January 1998, a series of measures to implement the reform program were introduced. The government announced steps to rehabilitate the banking sector and to assist in resolving the private sector's short-term external debt problem. These measures helped strengthen and stabilise the rupiah, albeit still at about Rp 10,000/$. The currency needs to strengthen to about Rp 5,000/$, an exchange rate regarded as realistic, and assumed in formulating the revised 1998/99 state budget. This is a tall order, but implementation of the key elements of the reform program agreed with the IMF could achieve it. Though the IMF opposed it, the establishment of a currency board system was under consideration during the Survey period. President Soeharto has now been re-elected for a seventh term. The IMF has announced it is postponing the release of the second tranche of financial assistance because Indonesia has failed to implement aspects of the reform packages. There have been widespread protests, both at university campuses and in regional centres; the latter often target ethnic Chinese retailers who have become scapegoats for public anger about the effects of the crisis. Meanwhile resentment against the IMF and foreign governments, especially the US, is on the rise. It is feared that Indonesia may go down the path of disengagement from the global economy. There are few choices left to the government. Unless the standoff with the IMF can be resolved and the key IMF reforms tan proceed, the consequences for economic policy making, for political stability and for the wellbeing of the Indonesian people will be grave.
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