Oleh : J. Soedradjad Djiwandono
Gurubesar tetap Ilmu Ekonomi, Universitas Indonesia

A Critical View on Fund-Supported Program

J. Soedradjad Djiwandono@

Indonesian crisis has been lingering on, and becoming the worst in Asia. It may even be simply just the worst amongst crises that the world was experiencing in the last few years. Even though this has been generally accepted as a fact, it is still curious to ask why is this so. In particular the question is relevant if confronted with another well accepted claim that at the outset the relevant fundamentals of the Indonesian economy were either at par with or even better than other crisis countries in Asia, and that the initial policy responses by the government were considered prudent and timely.

Together with two other crisis countries in Asia, namely Thailand and the Republic of Korea, Indonesia asked for the International Monetary Fund, here after called the Fund, to assist the government in designing and implementing policy adjustment programs in the framework of Fund-Supported programs. A relevant question here is, what has been the Fund’s role in the Indonesian crisis? Has the Fund been mitigating or exacerbating the crisis?

I would like to address these issues by discussing factual development of some macro economic indicators at the outset of the crisis with a view to the initial policy response and market reaction both before and after the Fund involvement. This will be followed by revisiting analysis on how the Indonesian crisis unfolded, including a critical assessment on the Fund’s role in the adjustment policies.


To know whether Indonesia’s macro fundamentals prior to the crisis are indeed better or, at least, not worse than other crisis countries in Asia, it is instructive to examine some indicators accepted by some as showing vulnerability to external shocks, as shown in the following table. With respect to external trade performance, both export growth as well as current account deficits in the first five years of 1990’s, and 1996 for Indonesia are better than Thailand and Korea. The growth of credits from commercial banks during the period prior to the crisis is relatively better for Indonesia. Other indicators, like the ratio of domestic debts to GDP, corporate debt to equity ratio, and the growth of bank loans to property sector are similar for all these countries.

However, it is also true that the number of non performing loans in commercial banks in Indonesia is worse than in other countries, and so is the concentration of ownership of publicly traded companies. The ratio of short term debts to international reserves in Indonesia is worse than the one in Thailand, but better than the same ration in Korea. It is generally true that Indonesia’s macro fundamentals prior to the crisis are better for some and similar for other indicators than those of Korea and Thailand.

Table 1









Corp D/Equity











Family comp





State comp











Property loans





NPL 96

NPL 98









ST D/Res





Export (96)





CuAc 91-95





CuAc 96






Source : rearrangement of Table 2, Asian Crisis Countries: Vulnerability Indicators, Andrew Berg, The Asia Crisis: Causes, Policy Responses, and Outcomes, IMF Working Paper no. WP/99/138, p. 8 and table 5, Assets of Corporate Relations with Banks and States, Qaizar Hussain and Clas Wihlborg, Corporate Insolvency Procedures and Bank Behavior: A Study of Selected Asian Economies, IMF Working Paper, WP/99/135, October 1999.

The initial policy response facing rupiah depreciation in early July 1997 was for Bank Indonesia to widen the central bank intervention bands in the foreign exchange market as dictated by the mechanism in a managed floating exchange system that the government was currently implementing. This action was accompanied by judicious intervention with the support of monetary and fiscal measures to prevent rupiah from experiencing rapid depreciation. This was done in mid-July 1997. When the policy was no longer tenable, rupiah was floated in mid-August 1997. It should be noted that by this time the currencies of the neighboring countries were already floated.

From this time on, the government was working hard, albeit in vain, to extend macroeconomic policies into a more coordinated prudent monetary and fiscal policy together with measures of liberalization in the real sectors, in other words to conduct a set of adjustment programs to fight problems of distressed economy. Early in October 1997, when the problems had clearly changed into a wide spread financial distress that endangered market confidence, the government decided to invite the Fund in the framework of a stand-by arrangement (SBA). 1Inside Bank Indonesia, I used to refer to the adjustment policy measures that the Indonesian government implemented during this period, August – October 1997, as "self imposed IMF program" due to the similarity of the steps that the government decided to take with a Fund – supported program. Of course here there was no use of the Fund facilities, nor any involvement of the Fund staffs.

The International Monetary Fund commended these policy responses by the Indonesian government. In fact, during the meeting of the Consultative Group on Indonesia (CGI) in Tokyo, in mid July 1997, all representatives of the creditor countries and multilateral institutions who were presence offered congratulations to the Indonesian delegation on the matter. It was reported in the media that Indonesia’s policy to cope with the external shocks was preemptive, timely and prudent.2

The above observations could not explain well, and in fact contradict the fact that among the crisis countries Indonesia fares the worst. Some indicators on the impacts of the crisis on variety of variables in the respective economies of the crisis countries are shown in the following table. The two most telling impacts of the crisis that show how Indonesia suffered the most from the crisis are the currency depreciation and the negative growth of the gross domestic products. Both using nominal as well as real measurement of depreciation, rupiah’s depreciation is more severe than the three other currencies, and so is the negative growth of the gross domestic products (GDP). The decline in the capital market index is slightly better than that of Thailand and Malaysia, but it is worse than Korea.

Table 2

(June 97-March 98)


Nom Ex Rt










Nom In Rt










Stock Index ($)





Stock Index (L cu)





Source: Adapted from Table 5, Andrew Berg, The Asia Crisis: Causes, Policy Responses, and Outcomes, IMF Working Paper, No WP/99/138.

Some other indicators underline the worst position of Indonesia. These include, the number and severity of social and political tensions, including riots and demonstration, and the number of unemployment. Furthermore, the other crisis countries have experienced recovery where economic performance shows that some macro indicators, like exchange rates, interest rates and inflation rates, were back to the pre-crisis levels or better. Korea has started to make repayments of its loans from the Fund. Thailand did not make use of the last drawings of its SBA. And both countries are basically out of their respective Fund-supported programs. In contrast, Indonesia at present still have to suffer from a Fund decision to postpone disbursement of the current stand-by loan due to disputes on some items of the conditionality.


Studies, writings and conferences about the Asian crisis have been conducted continuously almost immediately after the Thailand’s financial shock of July 2, 1997. Different factors have been identified as the cause or origin of the crisis. Basically, there are two groups that hold different arguments for explaining the Asian crisis The financial panic theory which maintains that the crisis originates from a shift of market perception from bullishness to meltdown. Through herd instinct, the shift of market perception caused capital reversals, which lead to the ensuing of severe depreciation of currencies and the collapse of the exchange rates of the host countries. The other theory shows that the crisis originates from the weak domestic fundamentals, crony capitalism, corruption and other structural problems. The structural weaknesses of the national economies lead to vulnerability of the financial market to external shocks. A variant of the latter theory pinpoints the weakness of the banking system as the origin of the crisis.3

In the varieties of explanations about the Asian crisis, it has been generally accepted that two factors are prominent in the Asian crisis, i.e. the weakness of the banking sector and the unsustainable corporate debts. These factors have been identified as the causes of the crisis or at least as factors that exacerbate the crisis. In this respect, we could use the First Dr. Stanley Fischer’s recent assessment of the Asian crisis. In his reflection about the crisis, the First Deputy MD of the Fund implies that the Asian financial crisis could be mitigated if only the crisis countries implemented flexible exchange rate system, more focus on the health of the financial system, more transparency of the monetary authority in their report of foreign exchange reserves, and that the Fund surveillance be more vigilant.4

I found that one cannot exclusively rely on any of these approaches to explain about the Indonesian crisis. It is indeed true that the devil is in its detail in this respect. The Indonesian crisis cannot be explained satisfactorily by saying that the market suffered from external shocks exclusively. Indonesia experienced some external shock as part of the effects of the Mexican crisis in the beginning of 1995, when rupiah was under attack for several days. By resorting to the current policy of managed floating, the central bank could restore the market confidence after conducting market interventions.

Likewise, one cannot satisfactorily explain the Indonesian crisis merely by saying that the origin of the crisis is domestic structural problems. Rupiah was also under attack in July 1996, after the burning of the headquarter of PDI-P, the Indonesian National Party headed by Megawati Soekarnoputri. In a similar manner, Bank Indonesia successfully stabilized the rupiah, merely by relying on the current practice of exchange rate management.

With respect to the weakness of fundamentals, either from economic inefficiencies, corruption or financial system, it is without doubt that these problems had been known and talked about publicly long before July 1997. Thus, it is curious for one to say that structural weaknesses are the origin of the Indonesian crisis while at the same time accepting the argument that the crisis started in July 1997.

It is even not entirely correct to take up Stanley Fischer’s explanation of the Asian crisis to describe Indonesia’s crisis. For one thing, it is disputable to argue that Indonesia was practicing a pegged or fixed exchange system prior to the crisis. The managed floating with creeping depreciation combined with periodic widening of the intervention bands is definitely not a pegged or fixed system. 5It is still difficult for me to accept the fact that in the perception of the market Indonesia prior to the floatation of rupiah in August 1997 practicing a pegged system. I would argue that this – a managed floating with creeping depreciation or rupiah coupled with steps to widen the intervention bands -- is part of the uniqueness of Indonesia. Different studies on Asian crisis also report that the Indonesian case is different from other crisis countries.

On the intervention policy and use of international reserves, one could also notice that Bank Indonesia did this very judiciously. It should be noted also that the definition that the monetary authority used in reporting the international reserves was more rigid than the gross reserves definition of the Fund. This is the reason why in the announcement of the agreement on the Indonesia’s Fund-supported Program in October 1997, the so called ‘USD 43 billion bail out for Indonesia’ included USD 5 billion of Indonesia’s own reserves that was ready for use. The amount was the Indonesian ‘saving’ arising from the different method of calculation of reserves between Bank Indonesia and the Fund. The Fund acknowledged that Indonesia has been very prudent in spending the international reserves for intervention.7

Of course, the other two remaining arguments, the health of the financial sector and better surveillance, are also the case with Indonesia. The banking sector was weak structurally, and in fact the banking system. And I could only underline what Dr Fischer said about the IMF surveillance on this matter.

I have been arguing on different occasion that the Indonesian crisis is a multi faceted one. It is triggered by an external shock, the drastic depreciation of regional currencies rates of exchange, started with the Thai baht. The contagious shock in foreign exchange market serves to reveal the embedded weaknesses of the national economies, social and political system, and a wave of shocks spread rapidly from foreign exchange market to the banking sector, the national economy, and in turn the social as well as politics of Indonesia.8 Experiences shows that external shock without contagious process didn’t develop into a crisis of the magnitude that Indonesia experienced since July 1997. Similarly, domestic shock alone didn’t lead to a crisis of the same magnitude. It was confinable.

However, the two factors that had been identified crucial to the Asian crisis had been well founded in the case of Indonesia. The banking system which was still in a state of consolidation was very week to face a contagious external shock. And the corporate debts in foreign exchange were indeed unsustainable, viewed from their relative as well as absolute magnitudes, in addition to their peculiar characteristics that they were mostly short terms and unhedged. Worst still, a big percentage of these loans were used to finance speculative activities, like property developments and to a certain degree equities trading.

Be that as it may, another curious question remains. That is, if Indonesia is recognized as a special case, based on the facts that at the onset of the crisis Indonesia’s fundamentals were relatively better than Korea and Thailand, and that the initial policy responses implemented by the Indonesian monetary authorities were timely and right, why ultimately Indonesia suffers the most? Why, despite the valid arguments raised here, the Indonesian crisis becomes the worst in Asia? This is the relevant question that still needs to be addressed.

Using bit and pieces information and data as partly reflected in the above table on indicators of vulnerability, there are some plausible explanations that lead to confirming why Indonesia become the worst crisis countries.6 If concentration of corporate ownership could be seen as a good indicator for crony capitalism which is associated with inefficiencies, corruption and other illness in a national economy, then Indonesia is indeed fare worst in this case.

Using ownership in corporations of the top 15 families in the respective countries, Claessens et al show that in Indonesia corporate ownership is very concentrated. Table 1 above shows that corporate ownership by the top 15 families in Indonesia is 67.3%, as compared to Malaysia and Thailand between 30-40 per cent and Korea between 15-25 per cent. If state ownership is added to this, the figure for Indonesia becomes 82.5 per cent.9 The concentration of ownership explains well the large percentages of non performing loans, and violation of legal lending limits committed by these corporations, which are associated with distress and crisis in banking. This phenomenon is closely related to other problem Indonesia that put Indonesia in a worse position relative to other countries, namely corruption. Ultimately, these must be rooted in the other institutional weaknesses that Indonesia is notoriously lacking, good governance and legal system.10

The ratio of short term corporate debts to international reserves prior to the crisis for Indonesia is also very high, 189 percent. It is only surpassed by Korea with 217 per cent. The ratios for Thailand and Malaysia are respectively 121.5 per cent and 45 per cent.

If one take the commencement of Fund-support programs as the starting point of a systemic adjustment policies to address crisis, it seems instructive to notice that both Thailand and Korea experienced a change of government that facilitate policy implementation to stop the bleeding and start the recovery process. Thailand had a new government in November 1997 that immediately strengthened the Fund - supported program which was started in August 1997. Korea had the same experience, when the Fund came on the government invitation in December 1997, the incoming government was already involved in the process of negotiations.

This was not the case with Indonesia. The first letter of intent (LOI) to the Fund was negotiated by Soeharto government. Also the second and the third ones.11 After Soeharto left the office, he was succeeded by Habibie, known as Soeharto’s crony. The real change of government, came only in October 1999 when Wahid was elected President. Or two years after the first LOI. If a change in government usually facilitate the smooth implementation of Fund-supported program, the fact that the change was only coming after two years also put Indonesia in a unique position.

With respect to resolution of corporate debts, there is also a contrast of treatments between Indonesia and the other two crisis countries that went to the Fund for help. Both Thailand and Korea addressed the problems of corporate debts very early in the process of their respective Fund-supported programs. In contrast, Indonesia had problems addressing corporate debts. It started sloppily only in January 1998, after the second LOI. Due to a lukewarm approach in addressing corporate external debts, in June 1998 a rudimentary framework was established (Frankfurt Agreement) and only in September of the same year that some scheme was established, the so called ‘Jakarta Initiative’. Part of the features of corporate debts resolutions, like ‘roll over’ which is very crucial to stop the bleeding of banks was not coming early for Indonesia such that the problems accumulated before a resolution was found.12

A similar story came out from the bank restructuring. There are two issues I would like to mention here. First on bank closure. With the benefit of hindsight, there is contrasting difference between closing banks and freezing financial institutions. The fact that banks serve as implementing agents in payment system while finance companies are not make a difference. Thailand initially freeze finance companies, while Korea did similarly with a number of merchant banks. All of them are not part of their respective payment systems, such that their closure did not directly disturbing the payment system. And, even they are not part of the payment system, the monetary authority did not immediately close the insolvent institutions. Only after some time, with a better preparation, like installing blanket guarantee into the system, that the respective monetary authorities liquidated them.13 Both Thailand and Korea installed blanket guarantee prior to taking step to liquidate their insolvent finance companies.

In contrast to the above, Indonesia liquidated 16 banks on November 1, 1997, several days before the Executive Board decided to grant Indonesia with a stand-by facility. In fact, the bank closure is part of the so called prior action or measures taken at the outset of a Fund – Supported Program. The impacts of the bank closure had been devastating when bank runs came about shortly after.

With respect to bank runs after the banks closure in November 1997, I found the critics arguing that the policy failed due to the absence of deposit insurance scheme not convincing. Indonesia designed a partial guarantee at the time of bank liquidation. The guarantee covered only small deposits, as most deposit insurance did. It was also the fact that at the time of its implementation, there was no disturbance as what generally described as banking panic in literature.

However, bank runs involved big depositors, which generally were not covered by normal deposit insurance in any case. If the argument was for a blanket guarantee, covering all depositors, I would tend to agree. In fact, Indonesia implemented blanket guarantee scheme only in January 1998, when banking system was practically collapsing. It was also the case that bank runs did not happen after the adoption of the blanket guarantee.

Thus, in the midst of a distress condition, Indonesia liquidated banks which by definition constituted a part and partial of the payment system, without putting blanket guarantee for banks’ clients into the system. The consequence had been very devastating. It was ironical that a measure which was adopted to build confidence to the banking system, ultimately resulting in a complete lost of it .

This does not mean that I do not support liquidation of insolvent banks. However, the Indonesian experience of closing banks in November 1997 raises some issues that have to be carefully considered, i.e. how and when insolvent banks should be liquidated. The unfortunate experience that bank runs followed bank liquidation tells us that closing insolvent banks, even though it is a right decision, should not be done when the market confidence is fragile. At issue is not whether to liquidate insolvent banks, but when you should do it. Of course this does not necessarily solve the problem also as for some people, bank owners for example, there is never be a proper time to close their banks.

Aside from the above, political economist’s argument on explaining the crisis is well to be taken here. For example, on the explanation of contagion that arises from a shift of market perception, the relevant question is whether the fundamentals that cause the shift of perception, that the financial sector is weakly regulated, came as a result of omission, the lack of administrative know how, or commission in the form of forbearance to favored parties? (Haggard, 2000, p 8).This has to be investigated further, but an indicator of cronyism as mentioned before seems to pint point the valid connection.

In a contagious manner, an external shock at the foreign exchange market leads to a financial crisis through its impact on the banking sector which serves in revealing its structural problems. In turn, financial crisis spreads to the whole economy through the working, or rather the collapse of financial intermediation which leads to economic crisis. And from economic crisis, the social and political crisis ensued, and ultimately we had a multi faceted crisis which lingers on. This is the Indonesian crisis that I observed.


Indonesian crisis has both external as well as domestic factors that are working in a contagious process to produce a multi faceted crisis that lingers on for such a long time, impacting practically all aspects of people’s lives. With respect to the Indonesian crisis, it is tempting to ask the followings; would the crisis hit Indonesia had there been no crisis of Thai baht? Would the Indonesian crisis be avoided if the banking sector was sound? Would the crisis hit Indonesia had there been no cronyism nor rampant corruption?

In the argument that I develop here, the structural weaknesses within the Indonesian economy, social and politics had been there before. This means that these are important factors of how Indonesian crisis has been unfolding. The external shock in the form of Thai baht drastic depreciation in July 1997 only serves as a triggering point for the crisis to develop. I would argue that the triggering point could have originated from other shocks. It does not even have to come from economic factor. I observed that the social discontent had been rampant in different places in Indonesia, the feeling of discontent against the oppressive government or bureaucracy. That implies that a social cum religious incident like what happened in Ambon, Maluku and other regions could be a triggering point for the crisis to arise and develop into a multi faceted crisis. But, without the shock of financial or social types, the crisis might only arise sometimes later, and that the Soeharto government might run longer. However, it is my contention that the crisis would come sooner or later.

A sound banking system and sustainable corporate debts would, for sure, become a good defense against the contagious nature of the crisis. In particular, a sound banking system would still be functioning in support of the payment system such that the real sectors did not have to suffer when a financial crisis broke out. In the similar nature if cronyism and corruption are not so rampant the national economy would be more resilient and not so vulnerable to the financial shocks or crisis.

If we go to some details, it should be noted that contagion is partly determined by market perception which blurs fundamentals or facts. For example it is difficult to accept why Singapore dollars, and to a certain extent also Malaysian ringgit, also under attacks during the crisis. Similarly, as I showed before, it is hard to understand why market players viewed the managed floating exchange system that Indonesia adopted consistently could be perceived as a fixed or pegged system.

As I said before, all the above could explain the lingering on of the Indonesian crisis, or even why it becomes worse than other crisis. However, none of the explanation is very convincing. It could only explain partially.

In general, the Indonesian crisis develops into a very devastating one due to he fact that so many parties are contributing to the crisis or exacerbating it. With respect to the government policy the biggest problem has been its lack of consistencies between the stipulated programs and their implementations. What do these involve?

These are some examples of inconsistencies or resulting from them. It should be noted that the Fund-Supported Programs for Indonesia started with the first LOI of October 31, 1997 which was agreed upon by the Fund Executive Board decision November 4, 1997. The program contained very comprehensive adjustment measures to cope with the crisis. However, there are many inconsistencies in their implementation;

  • A blatant inconsistencies came out early in the program implementation when the government announced to reactivate 15 big development projects which were previously included in the postponed ones, to pressures from Soeharto families and cronies.
  • At the outset of the program implementation, Soeharto intervention also damaging the execution of the decision to liquidate 16 banks. The monetary authorities had to succumb to the pressure to grant the purchase of a small bank by one of Soeharto’s son who partly owned a bank included in the 16 liquidated banks. In addition Soeharto families who partly owned some of the closed banks sued the Governor of the central bank and the Minister of Finance in court, in protest to the government decision to liquidate their banks. The market perception deteriorated drastically due to these two decisions for revising the program as agreed upon by the Fund.
  • Bank Indonesia confronted with constraints in implementing agreed policy for monetary tightening during the initial efforts to defend rupiah from severely depreciating. The Fund kept asking for Bank Indonesia to raise interest rates while Soeharto did not allow the central bank to do it. In fact, Soeharto instructed the central bank to lower lending rates to help the business community to resume their activities. It should be noted that Bank Indonesia did not enjoy its independent status until the enactment of the new central bank law in May 1999.
  • In January 1998 Soeharto signed an LOI to the Fund which in effect strengthen and improve measures which were agreed upon in the first LOI, which included discarding monopoly practice in clove trading and Bulog ( the state agency for food procurement) imports, abolishing subsidies to the aircraft industry (IPTN ), and the national car project. The implementation of all these measures were long and winding such that in effect the old practices were continued.
  • Soeharto was playing with a proposal from a shady professor for implementing a fixed exchange system with a currency board arrangement, which created an uproar among the G-7 leaders and the Fund. Instead of following the steps which had been agreed upon in the negotiation that resulted in the second LOI, Soeharto wanted to shift in gear to follow a different path.
  • Banking restructuring has been very slow, to a large extend due to pressures from different parties to deviate from the agreed upon programs. The fact that IBRA, the Indonesian Bank Restructuring Agency, in three years of its existence already experienced 6 changes in its management attested the presence of different interest groups that kept fighting for influence in its decisions to favor their respective interests.
  • The fight between the government and Bank Indonesia over the central bank management since President Abdulrachman Wahid in power also shows a similar problem.

If bit and pieces of data and information shows why Indonesian crisis becomes worse than the crisis in other Asian countries, inconsistencies in program implementation seems to complement them such that crisis in Indonesia seems to be protracted, and recovery keeps eluding Indonesia.


Three crisis countries in Asia asked for stand-by arrangements with the Fund in their respective efforts to fight against the onslaught of the financial crisis in 1997, i.e. Thailand (August 20), Indonesia (November 5) and Korea (December 4).14 The Philippines had been involved in precautionary arrangement with the Fund before. Malaysia elected to choose a different path from resorting to the Fund facility in coping with the crisis, in particular after the departure of Mr Anwar Ibrahim from his post as the Minister of Finance.

What has been the Fund’s role in the Asian crisis? Does the Fund help these countries out of the crisis? Does the Fund exacerbate the Indonesian crisis? To answer these questions accurately is very difficult. The answers to these questions need careful studies. However, as a general observation, it is only fair to say that the Fund has prominent role in the Asian crisis, either for the good or worse of it. This is particularly due to the fact that, at least three of the crisis countries in Asia went to the Fund for help.

In the Indonesian media, one could read statements by government officials claiming that some measures that are not domestically popular have to be taken because of the Fund insistence, for example on bank closure or abolishing subsidies of domestic oil consumption. These are clearly efforts by the government to suggest that the Fund determines the policy. The reverse could also be read from some media reports stating the Fund’s claims that these are the host governments’ own programs, nothing to do with the Fund. The truth must be somewhere in between the two extremes.

Of course, legally a letter of intent (LOI) is a document stating the intention of a Fund member country to ask for the right to receive a stipulated amount of loan ( or to purchase foreign exchange from the Fund) while submitting a set of measures or adjustment policies to correct the current problems in the balance of payments or the national economy. The programs belong to the government that propose to receive the loan in the framework of a stand-by arrangement (SBA). This means that the Fund’s claim that the program is the host country’s program is right.

However, in a way the host country’s claim that some of these measures are originating from the Fund is also true. Any Fund’s facility bears some requirements to be met by the receiving country, the well known conditionality. Even if the measures to be implemented are genuinely proposed by the government, they are designed in view of the Fund’s conditionality. In fact, the details of any LOI is usually discussed or negotiated between the government and the Fund’s staffs before submission for the Executive Board approval. Of course the actual measures and policies that constitute a set of adjustment programs are the result of a negotiation process between the government and the Fund. A letter of intent containing details of measures and other technical requirements that constitutes a Fund- Supported Program is the host government program, resulting from a negotiation between the government and the Fund.15

The term ‘Fund-Supported Program’ used in reference to the arrangement is not just because it sounds nice. In fact, it is properly reflecting the reality that the adjustment programs to be implemented by a country utilizing Fund facility are programs that are constructed jointly by the receiving member country and the Fund. Of course the government of the member country is the one to hold responsible of the policies. But, part of the Fund accountability should be in the form of not disowning any negative implications or even failures of any Fund-Supported Program. It is unfortunate that the media is in general crediting too much on successes and blaming too much on failures of Fund-Supported Programs to the Fund, and putting the governments really at the receiving ends. It is certainly not fair to give all the credits for successes to the Fund and all blame for the failures to the governments, or the reverse.

Obviously, all the Fund critics who blasted the institution on the ways the Fund handles the Asian crisis that have been dominating seminars and conferences as well as media coverage since crisis broke gave message to the Fund operation to learn from the crisis. From early critics like Jeffrey Sachs, Joseph Stiglitz, George Schultz, and the others, to recent ones, including the Meltzer Commission, show that the Fund needs fundamental changes in its operation.

Lately, the Fund itself under the new Managing Director Horst Kohler started to review its operation, in particular looking at the structural conditionality for possible streamlining. In general, the direction for the improvements of the conditionality is addressing the issue of the proliferation of the structural conditionality that ultimately reduce the sense of ownership of the host government. The improvement is directed towards focussing on the core function of the Fund, i.e. maintaining monetary and balance of payment stability.16

It seems valid to consider the Asian crisis as a wake-up call for the Fund, and other interested parties for that matter, to take a hard look at the role that this institution should play as guardian of monetary and financial stability, to a certain degree as a lender of last resort for member countries, in a world economy that is characterized by global finance with a free capital movements. The fact that Asian crisis turned out to be worse than most expectations, including those of the pessimists, must really produce a profound impact to the international efforts to reform this institution and the others.

From my experience negotiating the Indonesian Fund-Supported Program as well as my observation afterwards, I could see that the Fund has been making efforts to be more flexible, even though I cannot help to state that the process has been very slow. The reform of the Fund operation, especially when it comes to deciding on the conditionality is something which should really be welcomed.

However, I still have some general concern that remains. The Asian crisis has reminded both the governments as policy decision makers, the Fund and other institutions about the complexity of the problems any country is facing in a global economy that harbors free movements of capitals across national economies. Everyone seems to have convinced on the need for sound financial system for sustainable macroeconomic policies, the linkages between business operation at macro level and the macroeconomic management, the financial and the real sectors of the economy, as well as the close connection between economic management with social and political systems.

With this backdrop, the Fund is reforming itself to focus its operation and surveillance on its core function. All are a welcome move towards the right direction. But, one problem would remain. To construct a program encompassing all these elements in a short time of negotiations for designing a fund-supported program, under stressful conditions, resorting to the only available instrument in the form of liquidity supports from the fund, is basically too much to ask.

Singapore, July 4, 2001.

* Originally a keynote address delivered at The sixth Asian Inter-University Conference, held at the National University of Singapore, Singapore, May 2001.
@ Professor of Economics, the University of Indonesia, currently a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies (ISEAS), and former Governor of Bank Indonesia, the central bank of Indonesia (1993-1998).
1 Initially, I argued for resorting to a 'precautionary arrangement' which is similar to an SBA, except that the facility for drawing funds is optional. This was due to my initial reading of the condition that the main problem was the declining market confidence to the economic management of the government, and not necessarily the inadequate foreign exchange reserves holding by Bank Indonesia.
2 Consultative Group on Indonesia (CGI) is a forum organized by the World Bank, comprises of 18 countries and many multilateral institutions, that provide the government of Indonesia with loans and grants for development
3 See for instance, Haggard, The Political Economy of the Asian Financial Crisis, Washington DC: Institute for International Economics, August 2000.
4 Stanley Fischer, Asia and the IMF, remarks at the Institute of Policy Studies, Singapore, June 1, 2001 (
5 From 1994 to 1996 the intervention bands were widened 6 times, while the nominal rate of rupiah was depreciated 4-5 per cent annually.
6 See for example, Graciela L. Kaminsky, Currency and Banking Crises: The Early Warning of Distress, IMF Working Paper, no WP/99/178 ( Washington DC: IMF), December 1999.
7 SeeIMF, Structural Conditionality in Fund-Supported Programs, Box 8, p 40 (
8 See, J.Soedradjad Djiwandono, Bank Indonesia and the Recent Crisis, BIES, April 2000.
9 Stijn Claessens et al, Financial Restructuring in East Asia : Halfway There?, Financial Discussion Paper, No 3, (Washington DC: The World Bank), September 1999.
10 See, Qaizar Hussain and Clas Wihlborg, Corporate Insolvency Procedures and Bank Behavior: A Study of Selected Asian Countries, IMF Working Paper, WP/99/135, (Washington DC: IMF), October 1999.
11 The second one was even unique in character. Basically because he no longer trusted the Minister of Finance and the Governor of Bank Indonesia, he personally negotiated the programs and signed the document.
12 This is conjectured from the sequence of events in the Asian crisis as listed by Carl-Johan Lindgren, et al, Financial Sector Crisis and restructuring, Lessons from Asia, ( Washington DC: International Monetary Fund), 1999, in Box 1.
13 See David C. Cole and Betty F. Slade, Comments on the IMF Report on IMF-Supported Programs in Indonesia, Thailand and Korea: A Preliminary Assessment, (mimeo), February 2, 1999.
14 See Carl-Johan Lindgren, et al, Financial Sector Crisis and Restructuring, Lessons from Asia, Occasional Paper 188, (Washington DC: The International Monetary Fund), 1999, and Timothy Lane, et al, IMF - Supported Programs in Indonesia, Korea, and Thailand : A Preliminary Assessment, Occasional Paper 178, (Washington DC: International Monetary Fund), 1999, and Jack Boorman, et al, Managing Financial Crises: The Experience of East Asia, IMF Working Paper, No 00/107.
15 This is an easy target for domestic politicking. The critics, either incoming government officials in reference their predecessors, or others, could easily dub the participants in the negotiation as the Fund lackeys or mouthpieces.
16 Letter of MD Horst Kohler to the Fund officials, Streamlining Structural Conditionality, September 18, 2000 ( ). See also Conditionality in Fund-Supported Programs-Overview (