Indonesia Ends Controversial Currency Plan

Indonesia has shelved a controversial plan to stabilize its currency and is making progress on a revised agreement with the International Monetary Fund that will lead to badly needed economic reforms while protecting the poor, a senior IMF official said Friday.

Stanley Fischer, first deputy managing director of the IMF, said he thinks Indonesian President Suharto is now serious about reforms, after backtracking on earlier promises made as a condition of its $43-billion IMF bailout.

“Whether in order to save face or to preserve Indonesia’s reputation, they’ve engaged in a process of moving from saying ‘this agreement is impossible and unconstitutional’ to renegotiating an agreement,” said the IMF official, who was in Los Angeles to speak at UCLA’s Anderson School of Business.

His hopeful assessment represented a shift for the IMF, which has been in a tense standoff with Suharto over his reluctance to move forward with painful economic reforms. The IMF wants him to break up lucrative monopolies, many controlled by family members and close friends.

Fischer’s sentiments were echoed Friday in Jakarta by Indonesia’s finance minister, Fuad Bawazier, who confirmed that Indonesia is shelving its currency proposal. Fuad predicted that a deal could be finalized as early as next week, which would open the door for the IMF to release its next $3-billion payment to the battered country.

Indonesia had proposed setting up a currency board that would have pegged its currency, the rupiah, to the U.S. dollar. Instead, Fuad told reporters, his government might reinstate a currency trading band that would allow the rupiah to move within a certain range.

Fischer declined to comment on the proposed trading band except to point out that such a program does not protect a currency from speculative attacks.

Indonesia’s problems are far from over, however, as was evidenced by the hundreds of students who took to the streets Friday demanding that the government curb excessive price hikes on food and other staples.

Fischer acknowledged the dangers posed by social unrest in the world’s fourth-largest country and said a revised agreement would include measures to protect Indonesia’s poor from excessive price hikes. He said the IMF would also work closely with the Indonesian government to ensure that any subsidies of goods such as sugar be targeted to the poor.

The IMF has been sharply criticized for its handling of the economic crisis in Indonesia and other Asian countries, but Fischer argued in his speech that the IMF’s fiscal austerity programs succeeded in preventing the Asian fiscal crisis from spreading further and are leading to significant reforms.