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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

A Quick Fix? Maybe Not

Jakarta is still (just) studying a rupiah peg

By Jose Manuel Tesoro / Jakarta


Go to a story looking at the lives of ordinary people coping with Indonesia's chaos

THE INTERNATIONAL MONETARY FUND was issuing stern warnings. Foreign leaders were calling President Suharto. And Indonesia was coming close to sidestepping its promised economic reforms. Sounds familiar. It could have been early January. This time, though, the issue was not a disappointing state budget but a controversial plan to fix the exchange rate of the rupiah to the U.S. dollar. The IMF's managing director, Michel Camdessus, threatened to suspend $43 billion in standby credit if Jakarta prematurely implemented such a system, known as a currency board. On Feb. 20, U.S. President Bill Clinton called Suharto to "reiterate the importance of Indonesia sustaining economic reform policies." Three days later the White House announced that former vice president Walter Mondale would be visiting Jakarta as Clinton's "personal representative."

Responding to the pressure, government officials have begun hinting that Jakarta might delay setting up the system. Finance Minister Mar'ie Muhammad said Feb. 23 that Suharto would go ahead with a currency board, but he did not say when. The new central bank governor, Syahril Sabirin, said the board's implementation will be well-planned, not rushed. "At the end of the day, there is going to be a compromise [between Jakarta and the IMF]," says Rajeev Malik, an economist with Jardine Fleming in Singapore.

Suharto appears to favor the currency board system, which pledges a country's foreign-currency reserves against its local currency in circulation. In Argentina, Estonia and Hong Kong the system has reined in inflation and restored monetary stability. U.S. economist Steve Hanke, who first proposed the idea to Suharto, spent much of the past week vigorously defending the plan to local businessmen and government officials. But many seem uncomfortable with his arrogant manner and, more importantly, unsure about his ideas. They are concerned that Indonesia's $17 billion in reserves will not be sufficient to back the estimated 24 trillion rupiah in circulation. If rupiah holders convert massive amounts of the currency into dollars, interest rates will be forced up, deepening business woes.

The talk of a currency board, at least, has kept the rupiah's value stable for the past two weeks at about 9,000 to the dollar. The dispute also has distracted people from the fact that many reforms have yet to be implemented. The elimination of some monopolies has been delayed and plywood and clove cartels continue to operate, albeit in different guises. But the rupiah is worth just a quarter of what it was seven months ago, and many already feel the pinch. Imports of food and medicine are painfully expensive and dollar debts are weakening local companies. If the board were not implemented as soon as possible, Hanke warned, "within four months [the] economy would be dead."

Certainly something has to be done to shore up the rupiah. Its collapse is the cause of the country's economic ailments, its super-low value the main obstacle to recovery. The longer and deeper the troubles, the more disenchanted Indonesians might become with Suharto's policies. No wonder the president wants a quick fix. But even if he pushes ahead with the peg, Indonesia still faces a major challenge. The government has to revive the one thing money can't buy -- confidence in its determination to stick to a tough reform program.


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