IMF Offers Suharto Face-Saving Solution to Currency Dispute

The International Monetary Fund offered Indonesia a face-saving proposal Wednesday designed to enable President Suharto to back away from his plan to create a currency board--a move that the IMF warns could force it to cancel its economic rescue plan for Indonesia.

In private talks with Suharto, IMF officials in Jakarta said the 182-country organization would technically agree to go along with the currency board idea, as long as Suharto does not put it into effect until Indonesia overhauls its banking sector and carries out other IMF reforms.

Such an agreement by Suharto could head off an impasse between the IMF and Indonesia and avert a threatened cutoff of about $43 billion in loans to the financially troubled country by the IMF and major industrial countries.

IMF officials disclosed the offer after German Finance Minister Theo Waigel emerged from a meeting with Suharto in Jakarta to report that the 76-year-old Indonesian leader had promised to “rethink” his plan to create a currency board.

Early today, Indonesia’s new central bank governor also hinted that Suharto was backing away from the idea. A currency board “is just one method that can be used to stabilize the rupiah,” Sjahril Sabirin said after he was inducted by Suharto this morning. Sabirin said he couldn’t provide a time frame for when a currency board would be established, if at all.

Suharto’s acceptance of the IMF offer would effectively put the currency board idea on the shelf for at least several months and possibly a year or longer. The IMF has a long list of reforms that it says Indonesia must implement before a currency board can succeed.

A currency board is an independent panel that would replace Indonesia’s central bank, with the primary obligation of maintaining a fixed exchange rate for the rupiah, Indonesia’s currency--most likely by linking its value to that of the U.S. dollar.

Suharto’s children have been pushing the plan, which is being promoted by Johns Hopkins University economist Steven Hanke. The president’s children own several huge conglomerates, and a fixed exchange rate would enable them to pay off their foreign debts more easily.

Hanke and other proponents have argued that a currency board would ease the burden on business generally and make food imports less expensive, reducing political tensions.

But critics of the idea--including the IMF and finance ministers of all the major industrial nations--contend that the requirement for a fixed exchange rate for the rupiah would send interest rates soaring, worsening the current recession.

They say that no such plan can succeed unless a country’s currency is stable before the currency board is put into place and unless the government has a substantial cache of foreign-exchange reserves to defend its currency in the financial markets.

The value of the rupiah has fallen about 85% since July and the country has only about $19 billion in reserves--about a quarter of the amount most analysts say would be needed to keep the rupiah stable.

Influenced by the arguments of Hanke and his own children, Suharto has announced plans to put a currency board into effect soon. On Tuesday, he fired the head of his central bank, who had opposed the currency board plan, and replaced him with Sabirin.

Although indications that Suharto was heading toward the creation of such a board buoyed the rupiah in foreign-exchange markets for a few days, they drew heavy criticism from the world’s finance ministers. President Clinton called Suharto to urge him to change his mind.

Both government officials and private analysts have worried that, if Suharto successfully defies the IMF, other Asian governments might follow a similar route, which could unravel the entire Asian financial rescue effort.

On Wednesday, after a meeting with Suharto, Germany’s Waigel said that the Indonesian leader had “promised [that he would] rethink a currency board system due to our concerns.”

Waigel said the concept “is a good system, but it is good only for the long term. There is no alternative to IMF reforms,” he said.

IMF officials said they hoped to find out as early as today whether Suharto would agree to their compromise offer. That would be in time to influence a meeting of finance ministers of the seven largest industrial democracies in London this weekend.

Although the currency board proposal is not on the finance ministers’ agenda, they would be certain to issue additional warnings to Indonesia if Suharto does not end his defiance of the IMF. They already have indicated that they want the IMF to cut off lending if he does not.