INDONESIA-FINANCE: Power for Few, Debt for All

By IPS Correspondents Reprint | | Print |

Analysis - Abid Aslam

WASHINGTON, May 17 1998 (IPS) - Indonesia has broken down – its cities, political system, and economy rocked by the worst violence since President Suharto took power in 1965 – but the International Monetary Fund (IMF) remains unmoved.

The IMF controls Indonesia’s 43-billion-dollar international bail-out, agreed last November after the rupiah dropped 70 percent against the U.S. dollar in a little over four months. Three billion dollars in emergency loans, to help service foreign debts and shore up the country’s sagging reserves, were disbursed before the Fund’s agreement with the government in Jakarta fell apart over steps to be taken in exchange for the money.

Another one billion dollars was released early this month, after the sides signed their third agreement in six months. In exchange for the loan, Jakarta would cut fuel subsidies, ratchet up banking and financial sector reforms, and dismantle monopolies held by Suharto’s friends and family.

Suharto had told the IMF he did not want to lift the subsidies until “the right moment.” It was understood that moment would follow his confirmation by parliament as president for another five years, analysts said. Suharto was confirmed in March, agreed a new deal in April, got one billion dollars May 4, and cut the subsidies. Then all hell broke loose.

Rioting throughout the country culminated in a day of violence Friday in which 200-400 people were believed to have died in Jakarta alone. The government said the same day prices of various fuels – having been raised between 25 percent and 71 percent – would be lowered between eight percent and 20 percent.

The bail-out has broken down again. IMF staff left Indonesia Friday, following evacuations by foreign embassies and companies, and an IMF mission to Jakarta scheduled for this weekend has been postponed. Meanwhile, the United States – the IMF’s largest shareholder – and European countries have delayed payment of 1.4 billion dollars in bail-out funds from the Asian Development Bank.

Nevertheless, the programme itself “is still very much appropriate for Indonesia’s economic situation, and for restoring confidence and bringing about a resumption of economic growth,” an IMF spokeswoman told IPS Friday.

“We are monitoring developments in Indonesia closely and hope that all sides will exercise restraint,” she added. “We do not, however, feel it would be appropriate to comment at this stage on what are internal political issues.”

The IMF has weighed in on those issues by pushing its wide- ranging reforms. Officials here acknowledged some measures would meet popular resistance but insisted it was government’s job to deal with the fall-out.

“It is paradoxical that the IMF is willing to dictate terms to Suharto when it comes to managing the economy but not when it comes to fundamental economic rights,” an Indonesian human rights worker and researcher using the pseudonym ‘Aryati’ last week told a Congressional committee here.

“While it is apparently acceptable to the IMF that political power is monopolised, it absolutely insists that the debt be democratically distributed,” Aryati added.

Economic development had become the government’s religion, she told lawmakers. “But what do we have to show for thirty years of development? Two hundred families have fat Swiss bank accounts while millions…have had their land expropriated….And we have not heard their laments precisely because there has been no freedom to criticise what the state calls its development programme.”

The IMF has been complicit in muzzling dissent because it has required political stability, not reform, according to Emmy Hafild, executive director of the Indonesian Forum for the Environment.

Western and Asian officials, seeking to prop up the programme, have held talks with Suharto’s government but declined to meet independents or the opposition, Hafild said. As a result, they have strengthened the notion that only Suharto – and repressive elements within the government – could guarantee that stability.

By Friday, U.S. officials were suggesting Suharto now may be too weak to implement the IMF programme – but upheld its goals. Indonesia needs “a vigorous programme of economic reform as proposed by the IMF and political reform shaped through dialogue between the government and its citizens,” said State Department spokesman James Rubin.

But what of the programme itself? Since December, World Bank chief economist and Senior Vice President for Development Economics Joseph Stiglitz repeatedly – if sometimes indirectly – has assailed the IMF programme as off-target because it is aimed at government fiscal and monetary policy in countries with some of the world’s highest savings rates and most conservative fiscal policies.

Worse, the programme has courted full-scale depression. “Virtually every American economist rejects the balanced-budget principle during a recession,” Stiglitz said recently. “Why should we ignore this when giving advice to other countries?” He has since insisted his remarks were intended to spur academic debate.

Indonesia’s debt problem, even IMF officials agree, stems from the private sector, which owes some 70 billion dollars to overseas lenders. However, the Suharto regime, using opaque accounting practices, had quietly funneled money from its reserves to shore up those loans, fueling the crisis.

Foreign banks that now want their money back from Indonesian companies so far have failed to resolve their claims using a formula applied in Mexico in the early 1980s.

Few disagree that Indonesia must dismantle its ‘crony capitalism’ but, according to leading U.S. magazine ‘Business Week’, “To restart its economic engine, Asia needs deep structural change that promotes markets and breaks up elite power, not out-of-date contractionary policies that put common people out of work.”

Eight million Indonesians are without jobs and 12 million are expected to have been laid off by the time the IMF’s restructuring takes full force. There are five dependents to every worker, according to demographic data. Prices rose 25 percent in the first quarter of this year alone.

The proportion of Indonesians living below the international poverty line of one dollar per day has fallen from around 60 percent to 11 percent over the past 30 years, the World Bank says. Most of those boosted out of absolute poverty ended up with only about two dollars per day – in rupiah, which dropped 20 percent in value this past week.