Geoffrey Barker – Indonesia is on the brink of hyperinflation and is committing major breaches of its economic reform agreement with the International Monetary Fund, a confidential Department of Foreign Affairs report has warned the Federal Government.
The report – which details for the first time advice being provided to the Howard Government on the Indonesian crisis – identifies a series of "expensive family and crony projects" that are to go ahead in defiance of the IMF.
It has emerged as the Minister for Foreign Affairs, Mr Alexander Downer, embarks on talks in Washington with the US Government, the IMF and World Bank leaders in a bid to obtain more flexible treatment for Indonesia under the IMF program.
The report also describes as "quite alarming" Bank Indonesia's "injection of massive liquidity support (akin to printing money)" for the country's crippled banking system amounting to as much as 20 per cent of Indonesia's GDP.
The 13-page briefing, prepared by the Australian Embassy in Jakarta, has been obtained by The Australian Financial Review.
The damning report sets out in detail how the Indonesian Government has responded to the IMF reform package. It gives frank assessments of promised reforms not implemented and moves to ensure that the financial interests of the family and close associates of Indonesia's President Soeharto are not damaged.
Despite claims by Mr Downer that Indonesia deserves credit for its compliance with the IMF program, the report reveals deep concern and scepticism within DFAT about the intentions of President Soeharto. The disclosures will make it difficult for Mr Downer to argue his case in Washington for a more flexible approach based on the extent of Indonesian compliance with the IMF program.
The report explicitly identifies President Soeharto's oldest daughter, Tutut, as "the major beneficiary" of a triple-decker transportation project that is slated to go ahead, and notes special tax exemptions for the Timor car project run by Mr Soeharto's youngest son, Tommy.
It says monopoly control over the marketing of plywood and cloves seemed likely to continue despite apparent government moves to comply with IMF trade deregulation requirements.
The report says the newly appointed Indonesian Minister for Trade and Industry, Mr Bob Hasan – identified as "a close business associate of the president" – had imposed a new fee on plywood exports. It also says that although the clove monopoly, controlled by Tommy Soeharto, would be dismantled, "a similar trading arrangement for cloves" would be established.
It condemns the "apparent unwillingness" of newly appointed Indonesian Vice-President, Mr B.J. Habibie, to privatise the Agency for Strategic Industries as required by the IMF and notes Jakarta rumours that he will "find new means to impose restrictions on imports of foreign ships" which the IMF has demanded be removed.
The report suggests that the Indonesian Government's inflation target of 20 per cent is unrealistic.
"The economy appears on the brink of hyperinflation. Month to month inflation rose 12.76 per cent in February," it says. Hyperinflation occurs when the pace of price rises runs out of control, severely damaging the capacity of the economy to function.
The report also questions Indonesian compliance with IMF requirements that the country reduce its Budget deficit to 1 per cent of GDP.
It acknowledges the revised draft budget of January 23 "better meets the revised IMF requirements", but says the base assumptions of the Budget are "not entirely realistic given continuing developments".
It notes that despite the IMF requirement that Indonesia incorporate all off-Budget funds into the Budget within five years, the crucial investment and reafforestation funds were still not on budget in the January 23 draft Budget.
The report says 12 major infrastructure projects were postponed in line with IMF requirements, but adds: ". . . there are also contradictory signals that some expensive family and crony projects are to go ahead [in some cases, contrary to the program]".
The report reflects deep Australian concerns over the Indonesian banking industry, describing the banking system as "very weak".
It says government efforts to close 16 insolvent banks faced "difficulty caused by first family members, whose interests in particular banks were affected, who attempted to prevent closures through the courts . . . one family bank, Bank Andromeda, effectively revived as Bank Alfa".
It says many banks are in "dire straits" and that the replaced head of the Indonesian Banking Restructuring Agency, Bambang Subianto, "had been doing a good job" before being sacked.
Noting compliance with IMF requirements for the merger of state banks, the report says:"Rumours have close family associates with high chance of gaining directorships."