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Economic delinquent puts family before I... |
Economic delinquent puts family before IMFTHAILAND and Korea have accepted - if slowly and reluctantly - the strings of reform and restructuring which came with the financial rescue packages assembled under the aegis of the International Monetary Fund (IMF). Their reward has followed swiftly. The US has bolstered the IMF's $17.2-billion for Thailand with a $5-billion facility. Korea's compliance has won it a vote of confidence from foreign banks which are owed $100-billion in short-term loans. A roll-over of $20-billion in debts due in the next three months takes the pressure off liquidity, enabling industry to keep functioning. Indonesia, however, has now become the world's most serious economic delinquent. Its 76-year-old President Suharto - inevitably re-elected unopposed this week to extend his 32-year reign - continues, with his family and close friends, to duck and dive the IMF and the rest of the big financial powers. Indonesia won plaudits last October by going to the IMF for help at an early stage of the Asian contagion and apparently in a strong position compared to Thailand, which began the destruction of confidence in the over-borrowed "tiger" economies. The IMF assembled a package worth about $43-billion - including $5-billion from Indonesia's own reserves - and a set of conditions which included deregulating the economy and taking a grip on the largely bankrupt banking sector. Private corporate borrowers owed about $74-billion in foreign debt and as the value of the Indonesian rupiah collapsed - from 2 400 rupiahs to the US dollar to 15 000 rupiahs at one stage and lately ranging between 10 000 and 12 000 - they all went bust. Suharto has twice agreed to IMF proposals and then reneged on many of them - because they involved businesses controlled by family and friends. Last month an economist at John Hopkins University in Baltimore, Steve Hanke, was wheeled on to present an alternative to the IMF's medicine: a currency board like those which have successfully stabilised exchange rates for Hong Kong, Argentina, Estonia, Lithuania, Bosnia and Bulgaria. The currency board involves pegging the exchange rate to the dollar (or the Deutschmark in some cases). All domestic money has to be backed by holdings of the dollar in Indonesia (and Hong Kong). If funds move into the "peg" currency it automatically reduces local money supply and leads to higher interest rates; when funds flow in the reverse happens. Hanke's idea of pegging the dollar rate to 5 500 rupiahs had the approval of the Suharto clan as a quick-fix - and saw the exchange rate soar, bringing the dollar down from 15 000 to 7 300 rupiahs. The snag was while Indonesia's reserves (in January) of $19-billion would cover narrow money supply at the planned rate, it was insufficient to back the wider measure, including time deposits, notes and coins in circulation and current accounts. That would have needed about $60-billion. The IMF vetoed the idea - agreeing with forecasts that such a fixed rate would see a mass exodus into the dollar to pay off foreign loans which would drive interest rates to stratospheric levels. As it is, three-month rates are running at nearly 35%. The Indonesians backed off the proposal under pressure from all sources, including telephone calls from US President Bill Clinton and exhortations that huge international credits would flow if the Suharto regime did a deal with the IMF. But they have still resisted further implementation of IMF reforms - although 16 of the country's 240 banks were allowed to go under and two involved Suharto connections. Last week the IMF said it would suspend payment of the second $3-billion of the first $10-billion tranche of its package. It did so reluctantly. The economic crisis has already seen food-price riots - inflation is running at 32% - and rising layoffs as factories cannot raise credit to finance imported goods. Over the past two months there has been the rising spectre of violence against Indonesia's ethnic Chinese whose shops and businesses have been the focus of rioters. They constitute only 3% of a population of about 6-million but control a disproportionate amount of wealth and no one has forgotten the massacres of the mid-1960s - a crisis which ushered in Suharto's rule - when about 500 000 died, most of them Chinese accused of being communists. Some cynics believe that the Suharto government is using this concern as a bargaining lever. Indonesia will not be allowed to descend into anarchy and economic ruin simply because the IMF is proving sticky about details of how the economy should be managed. IMF managing director Michael Camdessus gave credence to this in Washington this week when he told a private lunch meeting that "in view of the high risk of human suffering and the risk of ethnic strife, we want to do everything possible to help this country and to maintain a constructive dialogue". Revelation of the 24% fall in Indonesia's forex reserves to $16-billion since the beginning of the year is heightening the crisis and a consortium of Japanese and German banks are considering a plan for a "stability fund" of up to $15-billion to help stricken Indonesian firms. Singapore has proposed a $20-billion international facility, outside the IMF package, supported by the world's main industrialised economies. Bargaining will be resumed when Indonesian officials meet with the IMF in Washington this week to try to break the deadlock. Negotiations will not be easy. Suharto's latest statement was that Indonesia might be in breach of its constitution - requiring a "family system of social co-operation" in the running of the economy - if it obeyed IMF requirements.
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