Habibie does not have a firm grip on economic policy or political power. If the country does not return to stability soon, say Peter Montagnon and Sander Thoenes, it could be set back years

First came a landmark deal to reschedule private sector debt, then the launch of an ambitious privatisation programme. Today, the International Monetary Fund resumes its review of Indonesia's economy with a view to reactivating the country's $43bn (£26bn) international rescue package.

Events have moved at such a cracking pace during the past few days that it might appear B.J. Habibie, Indonesia's new president, was consolidating his grip on policy. It might seem also that he had strengthened his hold on the presidency, thrust upon him last month after the abrupt departure of President Suharto.

Neither is true. Few Indonesians believe such frenetic activity will do much to resolve their country's fundamental problems. Not withstanding a few radical gestures, such as the freeing of political prisoners and recognition of hitherto illegal trade unions, Mr Habibie's administration is viewed as weak and transitional. The economy remains in virtual free fall, and there can be no revival of investment until political stability returns.

The failure of the rupiah to rally on last week's $80bn debt rescheduling underlines this concern. "The rupiah should strengthen," says Mohammad Sadli, a former energy minister. "If it does not happen, it is clear that the stumbling block is political confidence."

Mr Sadli has put his finger on the basic dilemma. There can be no economic recovery without a resolution of political uncertainties; yet the collapse in the economy is making political solutions harder. The failure to plan properly for the transition that everyone knew would inevitably follow the departure of former President Suharto risks producing a power vacuum; the danger is that economic and social development could be undermined for the best part of a decade.

The immediate problems are daunting. By the government's own calculations, the economy is expected to shrink by 10 per cent this year, though most private sector forecasts are closer to 20 per cent. Official unemployment is expected to rise to about 17 per cent, and inflation is already more than 50 per cent and heading higher. A large swathe of Indonesia's indebted corporate sector has been rendered bankrupt by the plunge in the currency. The local banking system has all but collapsed under a mountain of loan losses.

This litany of troubles would sorely tax even a well-established administration. Mr Habibie's chances of achieving economic normalisation are "close to zero," says Sjahrir of the Ecfin economic consultancy.

Among the tasks facing him – and the IMF team – is the need to determine a reasonable level for the budget deficit. It was an attempt to reduce spending by increasing fuel prices that sparked the final violent upheaval of Mr Suharto. "Physical infrastructure can be cut, not job and social safety net programmes," says Ginandjar Kartasasmita, co-ordinating minister for the economy.

Some economists believe significant savings could be achieved simply by ending the payments siphoned off by cronies of the former Suharto administration. But this looks a forlorn hope, especially considering the collapse of the tax base. Given the additional pressure on food supplies created by drought, the government may need to run a deficit of between 6 and 10 per cent of gross domestic product. That would be unprecedented for a country in the midst of an IMF programme, says Mari Pangestu, director of the Centre for Strategic and International Studies.

On top of that comes the cost of bailing out the banking system, which Ms Pangestu puts at about $20bn. So far Indonesia has made little progress in this regard. IBRA, its bank restructuring agency, has taken many banks under its wing but has done little to close bad institutions, merge others and create a viable banking system.

All this will require massive amounts of international aid. But the question facing the IMF, as well as bilateral donors who gather next month for their annual meeting on Indonesia, is how far to pump in money before the political transition is complete. While humanitarian considerations call for basic assistance, there is a risk that money will go down the drain if it is given to a government without a real mandate.

"The longer Habibie stays, the more painful it will be for the country," says Rizal Ramli, a critical economist. "It would be advisable for the IMF and the World Bank to withhold money. It would just go to the same corrupt regime."

But the circumstances in which Mr Habibie will give way to a successor able to command real popular support are impossible to predict. A diminutive former science minister with a passion for grandiose and eccentric development schemes, Mr Habibie was taken aback by the realisation of his own unpopularity when he was catapulted into office, according to diplomats.

Much of what he has done since has been simply to follow the advice of others. In the economic field he is dependent on Mr Ginandjar, just as he is on General Wiranto, head of the armed forces, for military support. Yet his desire to defer parliamentary elections until the end of next year suggests he hopes to consolidate his own position and develop a power base for the longer term.

Two factors militate strongly against this. First, the same public revulsion at the way the previous administration milked the economy is turning against Mr Habibie. His own wealth, as well as that of his family, is coming under public scrutiny. The other is that he simply cannot survive the continuing deterioration of the economy.

Mr Ginandjar, widely thought to harbour his own ambitions, is among those who disagree with Mr Habibie's election timetable. For the sake of economic confidence, he thinks elections should be held early next year.

At the weekend Emil Salim, a respected economics professor who is also sometimes touted as a possible presidential candidate, called for more speed. "Why should we have to wait until late next year if we could hold an election within six months?" he said. "The quicker the political problem is resolved, the quicker the economy recovers."

The precise timetable also depends on another set of imponderables. Some believe that, with universities due to close for their annual vacation, the student pressure that brought down Mr Suharto may abate, particularly since divisions are emerging in student ranks.

More important, the struggle for power only really began after Mr Suharto's resignation. Golkar, the government party, is in the process of disintegration. All the main actors need time to group and consolidate. While that process is under way it serves their interests to have a weak president.

It is noticeable that the two opposition politicians with the deepest popular support – Megawati Sukarnoputri, daughter of former President Sukarno, and Amien Rais, the Moslem intellectual – have been careful not to rock the boat. Diplomats say General Wiranto has been supportive of Mr Habibie partly because he wants a constitutional and orderly solution to the political dilemma. But he has also not yet completely consolidated his hold over the armed forces - in spite of the sidelining of General Prabowo Subianto, Mr Suharto's ambitious and temperamental son-in-law.

Another solution would be the formation of a formal caretaker government. Indonesia's constitution provides for the appointment of a triumvirate to run the country on a temporary basis. Such a group has been much discussed. It would include a military figure such as Gen Wiranto, former vice-president Try Sutrisno or former defence minister Edi Sudradjat. It would also contain a popular politician such as Ms Megawati, and a Moslem figure such as Abdurrahman Wahid, chairman of the Nahdlatul Ulama grouping, or an economic technocrat such as Mr Salim.

The failure of such a solution to materialise indicates the extent to which leading figures are pursuing their personal ambitions. In that vacuum, there is a risk of a new and violent convulsion as rivals clash and Indonesia's economic problems go unaddressed. "Decent people will become anarchists. They will have to, because they need to eat," says Mr Sjahrir.

It need not happen like this. For all the economic gloom, some analysts point to the resilience of the informal economy and the possibility of a sharp revival in agriculture now the drought is over. The rupiah devaluation has also spurred exports of some products such as pulp and paper, as well as of non-traditional ones such as marble. These factors could keep the wolf from the door until a more orderly political solution materialises.

But the foreign investors who are supposed to finance Indonesia's recovery realise it may be years before the former dynamism returns. The longer political uncertainty and economic distress continue, the greater the fear that Indonesia could compound its problems by settling on a government that is inward-looking, Islamic in orientation, and hostile to foreign capital.

"Our tragedy is that we have waited so long for this to happen," says Ms Pangestu of Mr Suharto's departure. "Now the opportunity is there before us, and we don't know what to do."

[According to the June 11 edition of FEER, Wiranto is quietly weeding allies of Prabowo. These include Brig.-Gen. Eddi Budianto, an academy classmate of Prabowo head of the important Bogor military district who has been transferred to the Coordinating Agency for the Maintenance of National Stability. Days later, another classmate and friend, the assistant for naval planning Vice-Adm. Achmad Sutjipto, was moved to head the Armed Forces Academy. FEER also said that speculation surrounds the future of Jakarta regional commander Maj.-Gen. Sjafrie Syamsuddin, military intelligence chief Maj.-Gen. Zacky Anwar Makarim and Marine Corps commandant Maj.-Gen. Suharto, all considered close to Prabowo. Analysts also predict a spring-cleaning of commanders at Kopassus, which Prabowo headed before being sacked - James Balowski.]