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Shortages worsen as rupiah slumps 30%

Sydney Morning Herald - June 18, 1998

Louise Williams, Dili – The battered Indonesian rupiah suffered another sharp fall yesterday, fuelling fears of widespread food shortages and more factory closures as the nation struggles to import even basic commodities such as rice and raw materials for production.

The rupiah hit a low of 16,800 to the US dollar yesterday morning, a drop of more than 10 percent since its close of Tuesday night, and a 30 percent slump this week alone. The plunging currency has dealt a severe blow to the new Habibie Government which is struggling against grim economic forecasts of up to 100 percent inflation and as much as a 20 percent economic contraction.

Earlier this week thousands of hungry people in three central Javanese towns rampaged through the streets, burning shops and businesses owned by the ethnic Chinese minority after a peaceful protest over food prices degenerated into mob rage.

The rupiah has now devalued by more than 66 percent this year alone, and more than 80 percent since mid-1997, when the economic crisis began, meaning price increases on imported items of up to 800 percent.

Many of Indonesia's biggest labour-intensive industries such as textiles, footwear and clothing rely on imported components such as cotton, and last year's devastating El Nin~o drought means rice crops have fallen far short of demand.

With large quantities of rice now being imported the Habibie Government is facing a huge subsidy burden because a rupiah rate of 16,800 would push imported rice prices to close to 5,000 rupiah a kilo, in a highly sensitive marketplace where poverty-stricken communities are struggling to pay 1,200 to 1,500 a kilo.

The rupiah depreciation is also having a devastating impact on the nation's airlines, forcing the cancellation of services as leased jets are repossessed. Indonesia's largest car manufacturer, Astra, which relies heavily on imported components, is to suspend production.

Indonesia's corporate sector borrowed heavily in US dollars ahead of the removal of the rupiah peg in August last year, and most are now technically bankrupt or struggling to meet debt repayments.

Downward pressure spilling over from the decline in the Japanese yen this week was blamed for early losses, but many other South-East Asian currencies remained stable yesterday while the rupiah plunged.

Local industry commentators blamed the rupiah's slide on local demand for dollars, as companies tried to secure dollar stocks to meet debt repayments and the depreciation pushes another rush by ordinary Indonesians to convert their dwindling savings into dollars.

Bloomberg news agency said PT Citra Marge Nusaphala Persada, an Indonesian toll road company controlled by the daughter of former President Soeharto, missed its $US6.3 million interest repayments this week.

A spokeswoman said the company was having difficulty buying sufficient dollars from Indonesia's ailing banking sector. The World Bank and foreign aid donors met earlier this month amid widespread concerns that Indonesia was facing a serious food crisis as imports dried up.

"What we are looking at is not food shortages in the absolute sense, but a significant decline in people's ability to afford basic foods, particularly protein sources and milk, which will have longer-term health implications," one aid official said.

Economists say the severe economic crisis could push as many as 60 million of Indonesia's 200 million people below the poverty line this year, and throw another 30 million out of work.