ECONOMICS: Indonesia vs IMF
Far Eastern Economic Review
March 19, 1998

 Stand-Off In Jakarta:
 President Suharto may think that Indonesia is too important for the IMF
 to cut off; But with its own credibility at stake, the Fund can't afford
 to compromise
  * By Salil Tripathi in Jakarta
    1162 Words

If it sounds too good to be true, it probably is. Perhaps
International Monetary Fund chief Michel Camdessus should have kept that
investment axiom in mind before committing $33 billion to Indonesia --
where President Suharto personally signed off on a wrenching reform
package in January without a peep of protest.
   Eight weeks later, Suharto is sending very different signals, and the
IMF is clamping the money tap. The 76-year-old leader, who was
re-elected on March 10 to a seventh term, declared that the reforms do
not accord with Indonesia's constitution. What's more, he continues to
flirt with the idea of creating a currency board to peg the rupiah to
the U.S. dollar. Economists warn that Indonesia lacks the reserves --
and probably the resolve -- to make it work.
 What kind of game is Southeast Asia's grand old man playing? Some say
political poker, bluffing the IMF to rake in support at home. But
increasingly, it is beginning to look like more than that. Suharto may
be convinced that his enterprise -- Indonesia -- is simply too big and
too important for the world to allow it to fail.
   "It wouldn't be surprising if he thinks like that," says a U.S.
official. "After all, we've been saying that Indonesia is an anchor
stone in Southeast Asia. But that misses an important nuance: How do you
actually go about preventing failure?"
   The stakes in this game are high. With its credibility increasingly
under question, the IMF can't afford to step down and give Jakarta money
without hard evidence of reform. That leaves Indonesia, where prices and
unemployment are rising sharply, in the middle of a dangerous stand-off
between its gunslinging president and the IMF sheriff.
   To show that it meant business, the IMF postponed a review of the
rescue package until April. Only after that, the Fund said, could it
disburse the next sorely needed tranche of $3 billion. But Suharto's
gambit puts the Fund and its biggest backer, the United States, between
a rock and a hard place. They can cut off Indonesia, possibly tipping
the world's largest Muslim state into an ocean of civil unrest. Or they
can succumb and bail out Suharto on his terms, which may prompt the U.S.
Congress to withhold a requested $18 billion in additional funds.
   Suharto's strategy seems to be working, at least partly. Leaders from
Malaysia, the Philippines, Thailand and Australia have urged the IMF to
go easy on Indonesia. And the IMF's first deputy managing director,
Stanley Fischer, has said the Fund was prepared to be "flexible" -- and
that it would weigh humanitarian issues in deciding when it would
release the funds.
   But on the other side of the street, the IMF is still getting
political support from the G-7 countries, as well as from the World Bank
and the Asian Development Bank, which have suspended funding. The U.S.
and Germany have sent high-level envoys -- former Vice-President Walter
Mondale and Finance Minister Theo Waigel, respectively -- urging Suharto
to stick to the IMF deal. But their visits may have served only to
convince Suharto that he is a major leader in whose personal survival
the world has a serious interest.
   Suharto takes great pride in being known as Bapak Pembangunan (father
of development). But the onset of the economic crisis has made a mockery
of his regime's singular achievement: In nominal terms, Indonesia's
per-capita income has fallen by three-quarters since last July, and
Jardine Fleming expects to revise its forecast of economic contraction
from 10% to 15% in 1998.
   Indonesia's leader has reasons to cling to the old order, which has
also enriched his family and friends. Despite the IMF's call to
dismantle them, family- and crony-run monopolies are still in place, and
new ones are being created. What's more, the central bank continues to
provide liquidity to dozens of near-insolvent banks. Implementing IMF
reforms would restore confidence, but it would also destroy the Suharto
family's economic empire.
   Suharto is keen to find a quick fix that will allow him to maintain
both his family dynasty and his leadership. Notes Andrew MacIntyre, an
Indonesia expert at the University of California in San Diego: "Suharto
has been fighting for his political survival. He cannot survive if the
economy does not recover. The economy cannot recover until the rupiah
can stabilize. And investors will not return until there is increased
political confidence."
   The president seems to be adopting a two-pronged solution. First, he
won approval for emergency powers that authorize him to curb social
unrest and subversive acts. This strengthens his position while allowing
his successor wide powers in the event of a transition during his
five-year term. Second, he still seems to be preparing to set up a
currency board, to peg the free-falling rupiah to the U.S. dollar.
Currency-board specialist Steven Hanke, a professor at Baltimore's Johns
Hopkins University, has returned to Jakarta.
   Markets fear the controversial rate-fixing mechanism may be in place
soon, even though the IMF has warned that such a measure would oblige it
to suspend aid. Meanwhile, a paper Hanke prepared that essentially
absolves Suharto of blame for the crisis circulates widely among
Jakarta's business elite. The substance of the 50-point IMF programme,
it reads, "undermined the current establishment just in a period when
political stability was needed the most."
   Some accuse the IMF of not understanding this political reality. But
the Fund is successful because it is apolitical and recommends sound
economics. Indonesia is not the first to implement an austerity drive at
the IMF's insistence. Brazil, Mexico, Poland, Russia and Argentina have
all undergone gut-wrenching reforms.
   For its part, the IMF is perplexed that Indonesia would renege so
quickly on its promise to implement reforms. Says Simon Ogus, chief
economist at SBC Warburg in Hong Kong: "You can't admit yourself to
Betty Ford's {alcoholism} clinic and then request a case of Scotch." If
the patient persists, the doctor can only pack up and leave, as the IMF
has said it would.
   An Asean diplomat explains why the president agreed to the deal: "You
can't expect Suharto to behave like a Western-educated leader. He signed
the agreement because he didn't want Camdessus to go home empty-handed;
he never meant to implement it."
   Still, Suharto hasn't burned his bridges with the IMF. His respected
economic adviser, Widjojo Nitisastro, is leading a delegation to
Washington this month. Notes Max Corden, an Australian economist at
Johns Hopkins: "Suharto has been wise in listening and accepting
excellent advice from professor Widjojo and others in the past." Perhaps
Suharto will surprise the world and fold, accepting the IMF's terms.
   Rajeev Malik, senior economist at Jardine Fleming in Singapore,
agrees there could be a turnabout, but also warns of the worst-case
scenario. "Indonesia may recede into a cocoon, close its capital
account, nationalize the export-oriented commodity-producing private
sector, or default on its official government debt," Malik says. "That
shouldn't happen, but in these times, one can't rule out Indonesia
turning isolationist."