THE ECONOMY: CURRENT SITUATION AND PROSPECTS
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Mei 1998 Writing towards the end of April 1998, the inevitable conclusion is that the economy is still in a very precarious position. However, the new IMF agreement, signed on April 9, is still the best program the country can have to eventually recover from its deep slump. The economy is expected to contract by some 4% on an annual basis, the first time in over thirty years. Inflation in 1998 will be close to 50%. With 25% inflation in the first quarter, the worst is hopefully behind. The execution of IMF package will be very painful because of the underlying "IMF philosophy", that is, that the country has to work itself out of the crisis by relative deflation and consequent contraction of the economy. Such contraction in major sectors of the economy, such as manufacturing, banking and construction (with a lot of lay-offs), has been compounded by the effects of the El Nino related draught, reducing production and growth in some agricultural sectors. The rupiah, at exchange rates close to Rp8000 per U.S. dollar, has depreciated some 75%. Seen from the domestic side, import prices have risen three times. If the rate of inflation for 1998, measured by some CPI index, must be controlled to below 50%, that would be either impossible, or monetary and fiscal policies must be very, very, tight to produce a relative deflation. That means sky-high interest rates, and many businesses will not be able to borrow , pay back and still make money. Small and medium scale businesses will be exempted from this fate as a social policy with support from IMF, the World Bank, the Asian Development Bank and some bilateral donors. IMF's optimistic scenario envisages that (provided the program is effectively implemented) the rupiah will significantly strengthen during the first quarter (May-July), by the end of the year touching Rp6000 per dollar, and strengthening towards Rp 5000 by the end of the fiscal year. At the moment, however, there is no sign as yet of such trend taking shape. Confidence is still fragile. It is a "chicken-and-egg" syndrome. What should come first after the signing of the IMF agreement: the strengthening of the rupiah or the first series of reforms implemented? At the moment, even the disbursement of the second tranche of IMF funds ($3 bln) is awaiting the mood of confidence of the IMF Board of Directors, who this time around "wants to take their time" in deliberating the Indonesian case. In November 1997, after the first IMF agreement, goodwill was great and they made great haste. Two developments can stimulate the normalization of financial transactions and recovery of the economy. First, the resumption of normal trade financing, i.e., the matter of acceptance of LCs issued by Indonesian banks. Second, increase of supply of foreign exchange from exporters unloading their hoarded dollars and a return of "flight capital" because of increasing confidence and strengthening of the rupiah "as a new trend". Again, this process can be procrastinated by a "chicken-and-egg" syndrome. But some foreign money has been attracted by the very high rate (close to 50%) of SBIs (central bank's paper for monetary contraction). A third factor awaited is the rescheduling of private debts, but even if a general formula can be agreed upon, implementation will take many months. Lastly, political stability has become more questionable, with the students' movement continuing unabated. This political unrest can be aggravated by dents in the price stability caused by policy induced price and tariff escalations of domestic fuels, electricity, public transport, etc. These are by themselves part of the IMF package which have to be implemented during this fiscal year. "Hence the outlook for the next quarter is bleak. But domestic companies >must not, and cannot, wait and do nothing in the mean time. They must >begin to restructure, reengineer and look for new opportunities. Such >opportunities can be found in any new situation. New opportunities could >be found in exports, replacement of imports, accommodating to the new >domestic demand, i.e., adjusting to the lower purchasing power, etc. (END)

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