Washington – The IMF is headed for a showdown with its third largest borrower on Thursday, insisting Indonesia was not ready for a rigid currency regime and highlighting political uncertainties there.

IMF First Deputy Managing director Stanley Fischer, using uncharacteristically blunt language about political issues, noted that Indonesia's rupiah currency had been hit by suggestions that Indonesia could select a vice president whose "devotion to new ways of doing things was limited". He gave no names but was apparently referring to Research and Technology Minister Jusuf Habibie, who is a candidate and a close confidant of President Suharto.

Fischer also said it was too soon for Indonesia to consider a currency board, an inflexible regime with a fixed rate of exchange where a country only issues money when it has sufficient reserves to back it up. A central bank becomes irrelevant. "We have concluded that a lot of options need to be in place before a currency board would make sense," Fischer told a luncheon seminar in Washington. "I do not believe that Indonesia is there at the moment."

The IMF package, coupled with doubts about the government's commitment to the program of economic and financial reforms which is underpinning the rescue deal, have done little to stabilise domestic financial markters. The govt (sic. Suharto) is therefore considering the drastic alternative of a currency board which government sources say could be ready within weeks.

Fischer said prerequiisites for a currency board included the need for adequate central bank reserves and a stronger financial system, while Indonesia would also need to settle problems surrounding a mountain of corporate debt.

US Treasury Secretary Robert Rubin, in his second comment on Indonesia's currency plans in two days, told a Senate Foreign Relations panel that several issues had to be sorted out before Indonesia could think about a currency board. "For this even to be worth considering you have to have underlying conditions that will enable it to work and I think there are enormous issues to be worked out in the Indonesian case before you can even consider doing it," he said.