THE ECONOMY LIKE IN SUSPENDED ANIMATION
> Kadin Indonesia Bulletin <
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THE ECONOMY LIKE IN SUSPENDED ANIMATION |
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> Kadin Indonesia Bulletin < |
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October 1998 The economy is not much better and not much worse than when we wrote a similar editorial a month ago. We observed then that rupiah rate of exchange "hovered at around Rp11,000 to a US dollar with an incipient trend of strengthening". If perhaps not exactly, we can say the same thing on October 1. If you exchange a $100 bill at the bank, you may get around Rp10.6 million. Against a restive political background, this is not bad. The sympathy of the international community to the plight of Indonesia continues. The monthly IMF support of $1 billion is being disbursed, tolerating large budget deficits. IMF monetary targets are met. But on the ground, life is still very difficult for many people and companies. Many prices important to consumers are edging up because such prices are increasingly adjusted to the current rate of the dollar. Depending on quality, 1 kilogram of rice is fetching a price between Rp 2000 to Rp 4000. One ton of imported rice costs about $280 c.i.f. A good part of imported rice will be distributed at low, subsidized prices. Rp 1000 per kilo rice will be made available to some 15 million families below the poverty line. The distribution mechanism, however, has not been working well because of complications (e.g., the Chinese are not discharging their traditional function because of perceived insecurity, their place taken over by cooperatives as part of an ideological policy). Other food items, like cooking oil, sugar, wheat flour, soybeans are decontrolled but trade and distribution are also still not working normally in the time of transition. Many, if not most, businesses cannot operate normally for lack of working capital. The banking system is not functioning because of the very high interest rates, i.e., 65-70% per annum lending rates against somewhat stable exchange rates (but swap premiums still very high) and high inflation rates (some 80% ) for the year but on the margin declining. The very high interest rates, highest in the region, are a reflection of IMF supported policies to prevent a further falling of the rupiah and as a brake against inflation. There is mounting skepticism against this policy because one does not see the proclaimed results. Under such circumstances, banks are not lending to companies, because they cannot afford the additional corporate risk. As long as the central bank maintains the prudential requirements, even putting the screw harder on, the banking sector remains dysfunctional. Banks try to survive by investing their liquidity in the interbank market or buying central bank's paper at higher rates than average deposit rates. There is, however, an interesting international development. The World Bank is appealing to Asian countries in crisis to spend their way out of it. This is diametrically against the IMF wisdom of economic contraction as a major means of adjustment. Indonesia is actually having it both ways: the IMF is not against major spending on food and public utilities, and has persuaded the aid consortium to provide Indonesia with $14 billion for this year, more than double the usual aid. But nevertheless, the very high interest rates are choking the economy and preventing recovery of production, even for exports. Banks will not give working capital for exporting companies to import raw materials for the same general reasons. The foreign banks are also not helpful because of harsh country limits. In the meantime, the political and social situation is getting worse. The legitimacy of the Habibie government is challenged by increasingly broader political circles and the students are becoming active again. Because of ties with the Suharto past the government is not able, or perhaps not willing, to solve politically delicate problems like the Megawati PDI, finding the culprits of the May riots, accounting for the still missing student activists, the probe into the wealth of the Suharto family. There is still a fair chance that Habibie will survive his transition term, because the opposition is very divided and some are ambivalent as to who should replace the him, before the results of the general elections. If that is so, we will continue having a weak government, i.e., presidency, an army and police struggling with a tarnished record and losing self confidence. In an era of political democracy they also cannot use the old harsh but perhaps more effective ways.
At the bottom of the society we see people taking the law into their own
hands, resulting in incidental breakdowns of law and order. Fortunately
such outbreaks are quickly over, but that is small consolation. One does
not know, when and whether, something will break down, or break out, very
much nearby. |
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