John Aglionby in Jakarta
The future of the Indonesian economy hung in the balance this week as President Suharto refused to adhere to conditions laid down by the International Monetary Fund (IMF).
Suharto is risking the termination of the IMF lending programme as he continues to draw fire from the institution for establishing a currency board which essentially relinks the rupiah to the dollar. His government is also still awarding lucrative contracts to his political allies, a practice the IMF frowns upon.
Last week the minister of mines and energy granted his son the contract to supply coal to the state electric company. This followed the government’s decision to allow a general, who is also deputy speaker of the House of Representatives, to launch a taxi company in Jakarta – despite a massive oversupply in the city.
It also became apparent this week Suharto is determined to see his boyhood chum, Jusuf Habibie, become vice-president next month. Markets reacted negatively to this news. International economists question his competence after he announced his “zigzag theory” last year. This says rising inflation should be countered with low interest rates, the opposite of conventional wisdom.
The currency’s collapse was also driven by escalating social unrest and international opposition to Suharto’s decision to peg the rupiah to the dollar.
He is taking most of his advice on the currency-board system from American economist Steve Hanke who was brought in by the leader’s daughter, Siti Hediyanti Rukmana, and his son, Bambang Trihatmodjo. This is seen as a clear indication Suharto has sidelined his internationally accepted technocrat advisers.
The IMF’s managing director, Michel Camdessus, has warned that “the risk is very high that the [IMF] would interrupt the programme and the financing of Indonesia” if Suharto continues to insist on establishing the currency board.
“Last month it appeared Suharto had sided with the IMF, not his family and friends,” said an international banker. “But he has done a huge U-turn.The long-term consequences for the nation are catastrophic. Recovery is getting further away, not nearer.”