Financial Times Monday February 16, 1998
Indonesia: IMF Warns Suharto It May Cancel $43bn Rescue
By Sander Thoenes in Jakarta
The International Monetary Fund has told President Suharto that it will pull out of a $43bn rescue package for Indonesia if he presses ahead with his plan to peg the rupiah to the dollar.
In spite of the IMF's tougher position, however, the defiant Indonesian leader at the weekend was sticking to his plan to create a currency board, which he announced last week to almost universal disapproval. US President Bill Clinton expressed his concern to Mr Suharto in a telephone call on Friday.
A currency board would introduce a fixed exchange rate for the rupiah against the dollar and, in effect, suspend monetary policy. The board would be able to issue currency only when it received dollars at the fixed rate.
IMF officials confirmed reports that Michel Camdessus, the fund's managing director, wrote last week to warn Mr Suharto that, if he went ahead, the IMF would withdraw its backing for the aid package, which includes $5bn from the government's own resources.
Prabhakar Narvekar, an IMF consultant who met Mr Suharto on Friday, said: "My impression is that he is still very favourably disposed to it." He said, however, that the president had not mentioned a date for introduction of a currency board.
Steve Hanke, the US economist who persuaded Mr Suharto to move ahead with a currency board, said: "We anticipate it will go forward without any problem, unless the IMF can come up with a better alternative."
Mr Hanke, who flew to Jakarta at the weekend, said the Indonesian president appeared committed to his plan. "He is an old soldier," he said. "He knows what it is like if you are in a foxhole and you have 500 people coming at you and you are out of ammunition."
Indonesian officials and many analysts have said Indonesia cannot sustain a currency board without the stand-by credits of the IMF package to back its $17bn currency reserve.
Mr Hanke would neither confirm nor deny that. He said he believed some Japanese and German banks supported his proposal, but their governments are believed to back the IMF.
The most urgent reason for a currency board is to enable the government to continue importing and subsidising rice, sugar, milk and stove fuel - all of which have become scarce and shot up in price - and thus avert more social unrest in the country, where food riots have been spreading fast.
Fighting was reported in eight cities on Friday, followed by weekend unrest on the islands of Lombok and Sulawesi, where 2,000 students set fire to shops.
Five people are known to have died, including two during the weekend. Police said they shot three rioters in self-defence.
Police have stopped buses from entering Jakarta from central Java, for fear of an influx of poorer people ahead of presidential elections in March.
"The social structure of Indonesia cannot take high inflation, let alone hyperinflation," Mr Hanke said. "We are looking at hyperinflation."
One banker said: "Indonesia's problem so far has been that when things get tough, this government wiggles. [Suharto] is a man who signed a 60-page document with the IMF and did not read it."
© Copyright the Financial Times Limited 1998
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