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Short-term solution to crisis

Sydney Morning Herald - October 9, 1997

David Jenkins &150; President Soeharto's decision to call in the IMF and the World Bank, his second attempt in as many weeks to staunch a hemorhaging rupiah, has sent what should be a convincing message to the financial markets.

In an area where a herd mentality so often prevails and where psychological counter-measures are immensely important, the president has in effect told the markets they are not just taking on Indonesia but Indonesia supported by the IMF and the World Bank.

That should be enough to provide a short-term stabilising influence on a market shaken to its foundations by the currency crisis.

But the fact that Jakarta has been forced to take this step suggests that the market either saw through the Government's recent - and largely cosmetic - attempt to defer a series of major infrastructure projects or was caught in a downward spiral of confidence with a momentum all its own. Nor will this be a cost-free exercise for Jakarta. The IMF and World Bank are certain to insist that Indonesia speed up the policy reform process.

Among the likely recommendations will be an attack on what one expert on the Indonesian economy calls "the more outrageous forms of cronyism".

The international agencies are also likely to push for the sort of reforms that would support a stronger financial system. At present, Bank Indonesia, the central bank, does not have the detailed supervisory capacity that is necessary to provide confidence about the viability of the financial system. As Dr Hal Hill of the Australian National University has noted, Indonesia's recent economic crises have come along, almost like clockwork, in the middle of decades.

In the mid-1960s, hyperinflation and economic decline ushered in the army-backed New Order Government. In the mid-1970s, Pertamina, the State oil company, ran up debts of $US10 billion, equal to about one-third of the country's GDP.

In the mid-1980s, oil prices collapsed at a time when oil was responsible for 75 per cent of export earnings. Now, in the mid- 1990s, the country is hit by a crisis which has seen the rupiah fall 36 per cent against the US dollar in barely three months.

The latest crisis coincides with fall-out from a foreign haze problem which has seen smoke from Indonesian fires blanketing many parts of South-East Asia. It comes six months before President Soeharto, 76, is expected to stand, unopposed, for a seventh successive five-year term.

It comes, too, at a time of mounting criticism over the business activities of members of the First Family and of others associated with the ruling group.

Jakarta announced two weeks ago that it would postpone $US17 billion in infrastructure projects and "review" another $US21 billion of government-connected spending.

However, this was largely a window-dressing exercise given that a number of those projects were not really under serious consideration. The fact that the president refused to kill off a number of costly and controversial projects associated with his family and friends did nothing to reassure financial markets.

Soeharto refused to pull the plug on a company headed by his son, Hutomo Mandala Putra (Tommy), who is spending $US1 billion to develop Indonesia's first "national car".

Nor was he willing to abandon a project under which the Research Minister, Dr B. J. Habibie, is attempting to carve out a niche for Indonesia in the crowded and highly competitive commuter aircraft market.