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Down to Earth IFIs Update

No. 5, June 2000

New IMF boss visits Indonesia to stomp on Capital Controls

The newly appointed International Monetary Fund (IMF) Managing Director Horst Köhler crushed speculation that Indonesia was poised to impose capital controls to defend the beleaguered Rupiah after meeting with President Abdurrahman Wahid.

Köhler 's visit to Jakarta came amid reports that the government is considering imposing some form of capital control to help strengthen the ailing Rupiah. The currency has fallen 18% this year and all the large international banks are forecasting an exchange rate of 10,000 Rupiah to one dollar. Comments from the Central Bank Governor, the Trade Minister and the Finance Minister appeared to support some form of regulation on Rupiah movements in and out of Indonesia.

The consequences for Indonesia centre around the fact that despite a 29% jump in exports in April (year-on-year), Indonesian exporters are parking their hard-currency earnings in offshore banks rather than repatriating to Indonesia. If this money flowed back it could finance the economic recovery. Further, Indonesia's debt is being increased. Of the debt about 40% is denominated in foreign currency. The World Bank estimated that a 20% fall of the Rupiah against the yen, as since happened, would add another US$5bn of debt. This is the same as the entire new IMF loan for three years. Each Indonesian now owes US$670 of debt of which the crisis bailout is around US$250 per person and this figure is growing every time the Rupiah falls.

Malaysia's use of capital controls during the Asian Crisis have been grudgingly accepted as successful by some in the IMF, but controls still remain anti-IMF orthodoxy as they are perceived as being contrary to the free movement of capital. Prime Minister of Malaysia Mahathir Mohammed, speaking in June, in Tokyo at the 6th International Conference on the Future of Asia, said capital controls can work for Indonesia and benefit the country as they did Malaysia. Critics have said capital controls could not work because of Indonesia large borders, however most capital outflow is electronically moved.

Another rift with the IMF may be looming too, over the contentious issue of cutting fuel subsidies. The move, a key part of Indonesia's agreement with the IMF, was delayed at the last minute before its April 1 starting date amid public anger. GoI has now said that fuel price increases would now be delayed until October, later than IMF officials had hoped. (AFP, June 5; Dow Jones Newswires June5; Asiaweek June16;Channel NewsAsia, June 9)

Indonesia's Capital Account

Indonesia has one of the most open capital accounts in the world for outflows. This is not a big problem if there are large inflows too, but this year's budget forecasted US$4.4bn of net capital outflow. At the height of the 1997/8 crisis outflow was tens of billions of dollars. Even during the fast growth years capital would flow out in the form of multinational companies profit repatriation on investment and interest on long term debt.

Capital Inflow and Outflow: Indonesia
    1994 1995 1996 1997 1998
Inflows (US$bn) Foreign Direct Investment (FDI)
Long term loans / debt
Foreign Portfolio Equity Investment (FPEI)
Outflows (US$bn) Profit remittances on FDI
Interest on long term loans / debt
Profit remittances on FPEI
Net (US$bn) FDI
Long term Loans / Debt
Source: World Bank (2000) Global Development Finance.

Washington finally approves release of US$372m IMF loan to GoI

On June 3, the International Monetary Fund finally approved, in Washington, the disbursement of a US$372 million loan to Indonesia. The decision by the IMF's 24-member executive board came after a review of the country's three year economic program to meet IMF-imposed economic conditions. The release will bring total disbursements to Indonesia under the Fund's $5 billion extended loan facility program to $715 million. The loan disbursement was delayed in April because of concerns about the progress of the economic reform program. The International NGO Forum on Indonesian Development (INFID) called for a draft of Letter of Intent (LoI) to be written in Indonesian language, revealed to the public and debated in the House of Representatives (DPR) before being signed.(Jakarta Post, June 3)

IMF tells Indonesia Cabinet to keep quiet

IMF country representative John Dodsworth has warned the Indonesian cabinet that cabinet ministers should avoid voicing their opinions in the open. Indonesia's senior economics minister Kwik Kian Gie responded by lashing out at the International Monetary Fund. He said "I've been patient for a while with the IMF, but the IMF this time they have made a baseless statement,". Kwik was visibly angry said attending journalists.

New IMF Reform Group set up, moves away from Poverty

New IMF Managing Director Horst Köhler has set up a special group to focus on reforming the much-criticized lending institution. At his first news conference since taking over on May 1, Köhler also said he planned to meet with members of the US Congress, to whom an advisory commission headed by economics professor Allan Meltzer has proposed sweeping changes of the IFIs. Köhler suggested a more tightly defined role for the global lender, saying it should concentrate on monetary and financial issues. In a subtle pull back from his predecessor's drive to push the Fund toward poverty alleviation, Köhler said he would be looking for separate roles for the IMF and the World Bank, both of which were set up to rebuild a global financial system after World War II.

New IMF managing director welcomes debate on Asian monetary fund

The International Monetary Fund's new managing director said he welcomed discussions about an Asian Monetary fund, an idea rejected by many IMF officials and member countries in the past. "I'm prepared to discuss everything ... It's up to the region to decide on an Asian monetary fund." Köhler said. During the early days of the Asian economic crisis, which began with the collapse of the Thai baht in July 1997, Japanese officials suggested an Asian monetary fund (AMF) could help East Asian economies in trouble and check financial contagion in the region. Western countries, including the US and other major funders of the IMF, shot down the AMF idea because they feared it would dilute the influence of the IMF in Asia.
(AFP, June 1)

This IFI update is published by Down to Earth, the International Campaign for Ecological Justice in Indonesia.

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