SOME LIGHT AT THE END OF THE TUNNEL?
> Kadin Indonesia Bulletin <
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SOME LIGHT AT THE END OF THE TUNNEL? |
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> Kadin Indonesia Bulletin < |
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October 1998 The good news in the second week of October is a significant (some 20%) strengthening of the rupiah. The rate has pierced the psychological barrier of Rp10,000 per US dollar. Most observers say that the main reason was the weakening of the dollar, not as yet an improvement of fundamentals of the Indonesian economy. But it was enough to inject some note of optimism among several KADIN businessmen. A more self confident business is an asset to overcome the crisis. 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. Bank Indonesia has more power to intervene to strengthen the rupiah. 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 policy induced changes in the distribution system. Other food items, like cooking oil, sugar, wheat flour, soybeans have been decontrolled and gradually the market is functioning better. 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., over 60% per annum lending rates against more stable exchange rates (but swap premiums still high) and lower inflation on the margin. he 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. We hope that Bank Indonesia will start lowering interest rates and engage in a pro-active policy of lending to the real sector to push exports. The extra corporate risk of individual banks should largely be borne by Bank Indonesia, through a guarantee scheme or other. here is 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. But 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. In the meantime, the political and social situation is not getting better. 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 recognizing the Megawati PDI, finding the culprits of the May riots, accounting for the still missing student activists, and the probe into the wealth of the Suharto family. However, 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., the
presidency, the 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
most of 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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