Indonesia Ready to Adopt Economic Reforms, IMF Says

Under intense international pressure to put its economic house in order, Indonesia declared Monday that it is finally prepared to begin making sweeping economic reforms prescribed by the International Monetary Fund to stabilize its currency and stock markets.

After a two-hour meeting with President Suharto, Stanley Fischer, the IMF’s second-highest-ranking official, told reporters that the Indonesian leader “didn’t leave any doubt” in the session “that he was willing to get behind the [IMF plan] and go beyond what had been agreed [on] in the original program.”

Fischer said he hoped to have the broad outlines of the new Indonesian plan, with specifics that Suharto intends to adopt, worked out in time to show Michel Camdessus, the IMF managing director, who meets with Suharto on Thursday.

Deputy U.S. Treasury Secretary Lawrence H. Summers, who early today also met with Suharto, added the United States’ endorsement to the Indonesian turnaround.

“It is clear that President Suharto recognizes the need to take strong steps of the kind that have been under discussion in the IMF to create confidence and to build on the foundation for prosperity that Indonesia enjoys,” Summers said.

Fischer’s disclosure was a major breakthrough in U.S. and Western efforts to prod Suharto--who apparently has come to see how much he and his country have to lose--into complying with the IMF demands. It was expected to have a significant effect on financial markets, which have been driving down the value of Indonesia’s currency, the rupiah, for several weeks.

When the markets opened this morning, a few hours after Fischer made his statement, the rupiah gained, while Indonesia’s stock market stabilized, rising in early trading by 2.1%, its first increase in five days.

If the two sides can agree on specifics of a new economic program, analysts said the accord would be an important step ahead for Indonesia and could boost other troubled Asian economies, whose currencies and stock prices have been declining in the face of market pressures.

The meeting between Suharto and Fischer took place in the midst of an unprecedented blitz by the United States and other major industrial countries, as well as Indonesia’s neighbors, aimed at prodding Suharto to move quickly to carry out the IMF-mandated reforms.

Besides meeting with Fischer and Summers, Suharto received telephone calls Monday from heads of government such as Japanese Prime Minister Ryutaro Hashimoto, German Chancellor Helmut Kohl and Australian Prime Minister John Howard.

Goh Chok Tong, Singapore’s prime minister, announced that he would visit Jakarta today to confer with Suharto about the need to comply with IMF prescriptions. The plunge in Indonesian stock prices has depressed the stock market in Singapore.

The U.S. delegation apparently shares Fischer’s general optimism about Suharto’s new willingness to meet IMF demands, although many specifics of the plan, which could hold the key to its success, still have not been worked out.

Summers met Monday with: Mar’ie Muhammad, Indonesia’s finance minister; Soedradjag Djiwandono, governor of the central bank; and with Widjojo Nitisastro, a longtime Suharto economic advisor, in discussions that were said to parallel Fischer’s.

U.S. Defense Secretary William S. Cohen, who is touring the region to discuss security issues with top Asian leaders and has been drafted to help pressure Suharto into making economic reforms, arrived in Jakarta today.

Suharto’s apparent change of mind Monday was important because Indonesia’s refusal, thus far, to carry out reforms recommended by the IMF has sent financial markets reeling, spilling over into other financially trouble Asian countries and undermining their recovery efforts.

International monetary authorities have been worried that unless Indonesia acts soon, the slump in the rest of the region will worsen. They also fear that Indonesia soon could be hit with even more serious civil unrest than the street demonstrations that have occurred so far.

The IMF has asked that Indonesia pare excessive government spending, cancel expensive--and unnecessary--construction, overhaul its fragile banking system and take steps to deal with its huge overhang of bad loans that its corporations have taken out from foreign investors.

But Suharto, a 76-year-old retired general who has ruled Indonesia since 1965, has declined to put the reforms into effect, partly because it would hurt his family, which has grown rich in local enterprises, and partly because he fears it will threaten his reelection in scheduled balloting in March.

Fischer tempered his remarks Monday with a warning that the major components of the new program still must be worked out and “translate[d] into a specific set of actions,” which the IMF team would work out in the next few days.

Among the major issues will be how far Suharto will go to get the government budget in line, whether he is willing to raise interest rates to defend the rupiah, how sweeping his banking reforms will be and how many costly infrastructure projects he will shelve.

His apparent willingness, however, to go “beyond” reforms prescribed by the IMF appeared to be intended to persuade markets that he is serious about carrying out the program, despite the political risks--both to his reelection and to peace and good order--that it may pose.

There was talk Monday that Suharto finally has come to realize that his government could face a more immediate--and possibly more disastrous--risk if he fails to act to regain the confidence of the financial markets and stabilize his currency and stock market.

Fischer noted that even with Suharto’s seeming shift, it could take months to regain confidence. “There are [so] many things going on at any particular time,” he said, that “you can never be absolutely certain that you can turn confidence around in two minutes.”

Officials here also disclosed that, on the advice of Lee Kuan Yew, former prime minister of Singapore, Suharto has hired former U.S. Federal Reserve Board Chairman Paul A. Volcker as a special economic advisor. Volcker, now an investment banker, left here Monday afternoon.

Summers is to fly to Thailand and Hong Kong on Wednesday, then travel to China, Malaysia and South Korea to talk with economic officials. Hong Kong was not on his original itinerary but has been beset by new financial turmoil recently.

The Hong Kong stock market plunged 8% Monday after the collapse there of the Peregrine investment banking house, one of the former colony’s largest; the firm became unable to pay huge debts owed to foreign investors.

IMF officials have assembled a $43-billion rescue package for Indonesia that includes $10 billion from the international agency and a pledge for $3 billion in contingency funds from the United States. So far, the IMF has doled out $3 billion in loans, while the United States has yet to provide a cent.

Asian financial markets have been rife with rumors that the U.S. and IMF will speed disbursement of the rescue package money if Suharto agrees to the IMF terms. But Washington has been discouraging any such talk.

Top administration officials reportedly believe that plowing more money into Indonesia is unnecessary because Jakarta has a huge cache of foreign-exchange reserves that is big enough to cover its problems. Instead, they say, Indonesia should make reforms that will help stabilize its markets.

Indonesia’s stock market has continued to plummet during the negotiations, dropping 9% more Monday to a level 23% below where it was at the start of this year. The rupiah’s value also has fallen, by about 26% since autumn.

The market plunge has taken a huge toll on the country, raising prices on imported goods and making loan repayments to foreign investors all the more costly. Companies have begun laying off longtime workers.

The widespread economic distress has sparked rare displays of opposition to Suharto, who had been expected to win easy approval for a fifth term. Even old allies and former generals have hinted that he ought to step down.

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