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Western diplomats urge $12bn rescue for Indonesia

Financial Times - October 13, 1997

Quentin Peel and Sander Thoenes, Jakarta –

Western diplomats in Jakarta are urging the International Monetary Fund and World Bank to co-ordinate a largescale rescue package for Indonesia - worth at least $12bn (=A37.4bn) - provided President ' Suharto accepts tough conditions to curb corruption.

The size of the proposed package would be large enough to defend the rupiah, the Indonesian currency, which faces pressure from demands to repay the still unquantified short-term debts run up by the country's sprawling industrial and banking groups.

It would be much larger than the $4bn credit facility mooted last week when the Indonesian government appealed to the IMF and the Bank for help in the face of a 32 per cent decline in the currency since August.

However, the proposed deal would require radical reform of central bank supervision of commercial banks, stricter rules to ensure transparency of government contracts and curbs on state and private monopolies.

Such regulation could affect the activities of many of President Suharto's family and associates, who control some of the most lucrative business sectors in the rapidly-growing economy.

"I don't think anyone realises the enormity of the decision," said a senior western diplomat. "They have just entered the highest-stakes poker game they have ever played. An extremely proud man has been persuaded to go along with it [the approach to the IMF and the Bank]. But they can't be sure how Suharto will react next."

Senior Indonesian government ministers have suggested a credit package could be put together under the IMF's extended fund facility involving relatively mild conditions. But western diplomats and bankers believe that unlikely. They recognise Indonesia has pursued sensible macro-economic policies in recent years, but are convinced action is needed to curb corruption and to impose stricter regulation on the private and state sectors.

The tough-but-generous strategy was proposed as the first IMF officials arrived in Indonesia to draw up details of the assistance programme, which may involve the Asian Development Bank and bilateral credit facilities from other governments.

"The Fund and the Bank are not going to soft-pedal. They are sure to go after good governance," said a western diplomat.