COPING WITH FINANCIAL CRISIS: Experiences and Lessons from Indonesia*
Oleh : J. Soedradjad Djiwandono Gurubesar tetap Ilmu Ekonomi, Universitas Indonesia
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 stand-by arrangements (SBAs).
I would like to address Indonesia’s experiences during the crisis; how the crisis actually unfolded, how the government with the help of the Fund dealt with the problems and hoe Indonesia fared in the process. The paper would begin with observing 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. Revisiting analysis on how the Indonesian crisis unfolded, including a critical assessment on the Fund’s role in the adjustment policies will follow this. Some lessons to be drawn from the crisis and how the government coped with it would be presented as concluding notes.
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 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: VULNERABILITY INDICATORS
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 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). Inside 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 Fund 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 in the conference 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.
The above observations
could not explain well, and in fact contradict the fact that among the
crisis countries Indonesia fares the worst. Some indicators that show
the impacts of the crisis on different variables in 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.
Source: Adapted from Table 5, Andrew Berg, The Asia Crisis: Causes, Policy Responses, and Outcomes, IMF Working Paper, No WP/99/138.
Other indicators confirm 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.
A PROTRACTED CRISIS
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.
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 Dr. Stanley Fischer’s assessment of the Asian crisis. In his reflection about the crisis, the then First Deputy MD of the Fund implied 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.
I found that one couldn’t 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, the present President. 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. It 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 reserve 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.
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 currency 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. Experiences show 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. 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. 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 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.
The ratio of short-term corporate debts to international reserves prior to the crisis for Indonesia is also very high, 189 percent. Korea only surpasses it with 217 per cent. The ratios for Thailand and Malaysia are respectively 121.5 per cent and 45 per cent.
If one takes the commencement of Fund-supported program 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. Soeharto government negotiated the first letter of intent (LOI) to the Fund, likewise the second and the third ones. After Soeharto left the office, he was succeeded by Habibie, which was known as Soeharto’s crony. The real change of government, came only in October 1999 when Abdulrachman Wahid was elected President, which was 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.
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 freezes 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. 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 bank 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 in literature discussing about banking panic.
However, bank runs involved big depositors, which generally were not covered by normal deposit insurance in any case. If the argument were 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 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, 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 inter-mediation, 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 AND THE FUND
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). 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 determine 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 proposes 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. 
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 reduces 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.
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. Table 3: Financial Position in the Fund As of March 31, 2002
The Indonesian experience in implementing Fund-supported adjustment programs in its fight against financial and economic crises seems to demonstrate that a consistent policy implementation is very crucial for the its success. The long waiting for the coming of a turning point through change in administration is one factor.
The democratic change of government in Indonesia, which gives its legitimacy, was only occurred in October 1999, two years after the first LoI. But, the presence of a new and legitimate government does not in itself guarantee the coming of an economic recovery either. It only serves as a starting point for a process toward recovery. This has to be followed by consistent implementation of a good program, which has previously been prepared. Our experience with the government under President Wahid clearly showed this. President Wahid wasted the golden opportunity to consolidate the good start of his administration, which was very well supported by the public and the market of both internally and externally, in addition to a healthier world economy of 1999. A more consistent policy would have been producing a sustainable recovery, as we observed in both Thailand and Korea.
From the first adjustment program in 1997 to the most recent one, hurdles that have been constraining the success of the program generally arise from inconsistencies in its implementation. The inconsistency itself may come from, using Stephan Haggard analysis, sins of omissionfrom the lack of administrative capacity and know-how. Or it may arise as the result of commission, in the form of forbearance to favored parties. 
There seems to become a pattern also that in the crisis government officials tend to prefer to be inactive and reactive for avoiding risks. In the new era of more transparency, the government becomes timid in making any decision due to the fact that any decision is risky, at least for being open to any criticism.
There have been inconsistencies of program implementation in every administration from the first time Indonesia involved in Fund-supported program to address problems arising from the crisis. Several blatant inconsistencies came out early in the program implementation that was committed by Soeharto government. But, to some extend some of the inconsistencies have been carried on to the present.
These are examples of inconsistencies in the implementation of the first letter of intent, signed by the government of Indonesia October 31, 1997;
When the government announced to reactivate 15 big development projects that were previously included in the postponed ones due to interventions by President 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 was 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  . Granted that high rate of interest policy is still debatable as to its effectiveness. But the inconsistency did a lot of damage to the credibility of policy implementation
In January 1998 Soeharto signed a letter of intent to the Fund, which in effect strengthened and improved the previous measures, which were agreed upon in the first LOI. These 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. All are Soeharto pet projects. The implementation of all these measures was long and winding such that in effect the old practices were continued.
Soeharto was playing with a dubious proposal from Professor Steve Hanke for implementing a fixed exchange system with a currency board arrangement (CBS), which created uproar among the G-7 leaders and the Fund. Instead of following the steps, which had been agreed upon in the negotiation, Soeharto wanted to follow a different path.
However, inconsistencies in program implementation have not been the monopoly of Soeharto administration. All his successors for whatever reasons have been committing similar inconsistencies, albeit smaller. These are some examples;
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 less than four years of its existence already experienced 7 changes in its management attested the presence of different interest groups that kept fighting for influence in its decisions to favor their respective interests. Corporate restructuring has also been incredibly slow.
A fight between the government and Bank Indonesia over the central bank management since President Abdulrachman Wahid in power also shows a similar problem.
The program of privatization and its implementation have always been confronted with constraints, which arises from different reasons, from conceptual, social, politics, as well as personal interests.
The policy for eradication of corruption and the efforts to develop good governance in both the public and private sectors have been generally disappointing all along. In general law enforcement under all the administrations have been poor.
An ambivalent attitude towards the role of the Fund in the government of Indonesia’s efforts to fight the financial and economic crisis has always been creeping among some group of Indonesians, including those in the administration. Public discussions on variety of economic and financial issues since the crisis have usually been linked to some concern about the Fund involvement in the government policy. In general, government policy relying on high rate of interest to defend the currency, issues related to the choice of exchange rate system, including the use of capital control or currency board technique, implications of bank closures, the policy to help banks with liquidity supports, and the implementation of blanket guarantee, have been encountering strong critics in the Parliament as well as in public debates.
Some of the concerns originate from early criticisms on the Fund’s adjustment policy prescription to developing countries that sometimes ineffective due to its reliance on ‘one size fits all’ type of program. To be fair, the Fund has been learning this lesson, albeit only slowly.
However, there are also areas that certainly the Fund could still learn more lessons from the Indonesian experience in the last four years of muddling through of the financial and economic crisis. These may not have any relation with inconsistency, but the following points should be noted;
Based on ex-post analysis, there are two areas of problem that most seem to accept as either part of the causes or a complicating factors of the Asian crisis, i.e. the weak banking sector and unsustainable corporate debts. The Indonesian experience on bank closures in November 1997 and the initial policy to shy away from dealing with corporate debts problem, seem to indicate the presence of weak preparatory works, not just from the government but also the Fund.
The adoption of blanket guarantee in the banking sector in late January 1998 had also been creating controversy as to why it was adopted and for those agreeing with the scheme the issue was why was not it adopted earlier. This was the government decision. But, the Fund was very much involved in the decision to adopt the scheme.
In all these issues, if the problems originated domestically, certainly they also implicate the Fund. Professor Kim Dae-Hwan good in describing similar issue on the Korean crisis, it is certainly ‘home grown, but not home alone’. 
In the early implementation of the program the Fund inflexible requirement to impose on the Indonesian government to produce a budget surplus for 1998 turned out to be a disaster. The Fund retracted the decision in January 1998 to allow the government implementing a budget with a deficit. But, it was too late; the market punished the rupiah severely due to the government’s balanced budget that violated the Fund’s requirement.
Changes in government seemed to serve well in producing a turning point to stop economic deterioration in Korea and Thailand. To a certain degree it has also been the case with Indonesia. This seems to also be the case of changes (turning point) in the Fund policy. Serious efforts to improve the Fund structural conditionality, to make its operation more focus have been running in full steam after changes in the Fund management, from Michel Camdessus and Stanley Fischer to Hort Kohler and Anne Krueger.
The working relation between the present Indonesian government and the Fund seems to be in better shape. The Fund has been learning some lessons from managing crisis in Indonesia as shown in its views on budget deficits, corporate debts, and social implications of the crisis. The Fund has been working on streamlining its structural conditionality. Similarly, the Indonesian economic team has been showing the willingness to make adjustments required.
However, the problems and challenges facing the Megawati’s government have been much more daunting, due to the continuing past practices of policy inconsistency and worsening world economic prospects. For example, facing a slowing down of the national economy the government cannot automatically resort to the conventional policy of fiscal stimuli or loose monetary policy. With a budget that already suffering from deficit, any fiscal stimuli is constrained already. And, with the size of budget deficit is predetermined in the performance criteria, the constraint is automatically binding. Like wise, lowering interest rate or adding base money is constrained by the performance criteria. The degree of freedom in macroeconomic management is very limited, due to the existing Fund-supported program. The nature and magnitude of the problems in a new environment of a learning process of democracy and transparency have even seemed to make the government occasionally indecisive, which ultimately contributes to the complexity of the problems. In fact inertia seems to be rampant, and the process of muddling through stays on.
Flexibility in both the Fund as well as the monetary authority should be in order here. The issue of tight monetary stance and high rate of interest have come and gone. Some empirical studies have been demonstrating the ineffective use of high rates of interest to stabilize exchange rates. 
Of course, to the claim that high rate of interest is not an effective instrument to defend the exchange rate, one could cite how Hong Kong successfully saved its currency against the onslaught of speculative attack in October 1997. High rate of interest is indeed not impacting negatively on economic growth in a very short period of time. However, high rate of interest for a long period is definitely detrimental to economic growth. Problem will arise, when the high rate of interest is extended for a long period.
During the crisis we observe a shift from a problem of bank liquidity problem to solvency problem in a very short period. An instrument, which may work effectively in the short run could cause problem in the longer period. A high rate of interest, which may be effective in the short run to strengthen the currency, could easily creating negative implication in the long run.
In this respect, the new Fund policy of focussing on its core functions is definitely a step in the right direction. Included in it is its concern over the issue of ownership of the Fund-supported program. The more cumbersome the conditionality, the more pressures by the super powers to impose their own agenda on the structural conditionality of the Fund-supported program, the more difficult would be for the government to stay consistent in the program implementation.
Until September 11 all the problems and challenges facing President Megawati originated from the previous administration. However, the terrorist attack in the US and the US-led response that triggers world economic recession has been causing additional challenges to the President and her Cabinet.
This time there is no strong US economy to serve as a locomotive to make the necessary pull. The Megawati government, which successfully made a sensible start, seems also stalling to follow up the good start with the right steps to accelerate. The past government missed the chance to start a recovery process. The present government made a good start, but the more daunting challenges seems to be more overwhelming that seems to make the government gives up before entering a recovery process.
Recent improvements have given some breathing space. But, they could not provide the national economy with more needed certainty and safety for doing business, returning of capital parked abroad as well as new foreign investments. The political elite has not been forthcoming in term of their resolves for addressing the national issues; it is unlikely that a breakthrough could come out prior to 2004.
Azis, Iwan J., 2001, Modeling Crisis Evolution and Counterfactual Policy Simulations: A Country Case Study, ADB Institute Working Paper, No 23, Tokyo : ADB Institute
Blustein, Paul, 2001, The Chastening:Inside the Crisis that rocked the Global Financial System and Humbled the IMF, New York: Public Affairs.
Boorman, Jack, et al, 2000, Managing Financial Crisis: The Experience in East Asia, IMF Working Paper, No. WP/00/107, Washington DC:IMF
Djiwandono, J. Soedradjad, 2000, Bank Indonesia and the Recent Crisis, BIES, Vol. 36, No1, 47-72.
Enoch, Charles, et al, 2001, Indonesia: Anatomy of a Banking Crisis Two Years of Living Dangerously, 1997-1999, IMF Working Paper, No WP/01/52, Washington DC; IMF
Goldstein, Morris and Dennis Weatherstone, 1998, The Asian Financial Crisis,Washington DC: Institute for International Economics, Policy Brief 98-1
Guitian, Manuel, 1997, Banking Soundness: The Other Dimension of Monetary Policy, in Banking Sounds in Monetary Policy: Issues and Experiences in the Global Economy, in Charles Enoch and John H. Green, Eds. Washington DC: IMF.
Haggard, Stephan, 2000, The Political Economy of the Asian Financial Crisis,Washington DC: Institute for International Economics.
International Monetary Fund, 2001, The IMF at a Glance, Washington DC: IMF
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International Monetary Fund, 2001, Conditionality in Fund-Supported Programmes —Policy Issues, Washington DC: IMF
International Monetary Fund, 2001, Structural Conditionality in Fund-Supported Programmes, Washington DC: IMF.
Kim, Dae-Hwan, 2001, Globalisation and an IMF-Controlled Economy: The Case of Korea, (mimeo)
Lindgren, Carl-Johan, Gillian Garcia, and Mathew I.Saal, 1996, Bank Soundness and Macroeconomic Policy, Washington DC, IMF
Carl-Johan, et al, 1999, Financial Sector Crisis and Restructuring
Lessons from Asia, Washington DC:IMF
*To be presented in a seminar at the Shanghai Academy of Social Sciences, Shanghai May 8, 2002.
 Initially, I argued for resorting to a ‘precautionary arrangement’ which is similar to a 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 held by Bank Indonesia.
 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
 See for instance, Haggard, The Political Economy of the Asian Financial Crisis, Washington DC: Institute for International Economics, August 2000.
 Stanley Fischer, Asia and the IMF, remarks at the Institute of Policy Studies, Singapore, June 1, 2001 (http://www.imf.org/external/np/speeches/2001/060101.htm).
 From 1994 to 1996 the intervention bands were widened 6 times, while the nominal rate of rupiah was depreciated 4-5 per cent annually.
 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.
 See IMF, Structural Conditionality in Fund-Supported Programs, Box 8, p 40 (http://www.imf.org/external/np/pdr/cond/2001/eng/index.htm).
 See, J. Soedradjad Djiwandono, Bank Indonesia and the Recent Crisis, BIES, April 2000.
 Stijn Claessens et al, Financial Restructuring in East Asia : Halfway There?, Financial Discussion Paper, No 3, (Washington DC: The World Bank), September 1999.
 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.
 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.
 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.
 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.
 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.
 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.
 Letter of MD Horst Kohler to the Fund officials, Streamlining Structural Conditionality, September 18, 2000 ( email@example.com ). See also Conditionality in Fund-Supported Programs—Overview (firstname.lastname@example.org).
 Stephan Haggard, The Political Economy of the Asian Financial Crisis, Washington DC: Institute for International Economics, August 2000, page 8.
 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.
 Dae-Hwan Kim, Globalization and the IMF-Controlled Economy: the Case of Korea, a paper presented in the Asian Studies Program, the National University of Singapore, July, 2001 (mimeo)
 See for example Iwan J. Azis, Modelling Crisis Evolution and Counterfactual Policy Simulations: A Country Case Study, ADB Institute Working Paper 23, Tokyo: ADB Institute, August 2001.