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U.S. reads the riot act to Indonesia. Economic crisis deepens: Suharto shoulders blame

By Barrie Mckenna, Toronto Globe and Mail
Saturday 10 January 1998

The top two officials of the IMF -- managing director Michel Camdessus and first deputy Stanley Fischer -- will visit Indonesia next week to "read the riot act" to Suharto...

...the rupiah has tumbled 70 per cent against the U.S. dollar...

WASHINGTON -- U.S. President Bill Clinton and the International Monetary Fund launched an emergency initiative yesterday to force Indonesia to swallow its bitter economic medicine.

Mr. Clinton warned Indonesian President Suharto in a 25-minute telephone call that his government must stick to the demanding terms of a $43-billion (U.S.) loan package.

At the same time, North American markets reeled over the deepening Asian financial crisis. In New York, the Dow Jones Industrial Average fell by 222 points or almost 3 per cent, while the Toronto Stock Exchange index dropped 218 points.

Indonesia triggered a plunge in its currency, the rupiah, this week after the government introduced a budget Monday that defied the IMF demands that it hold the line on new spending.

However, fear is now growing that the bailout, part of a $120-billion rescue package for several Asian countries, may not be enough to hold back a wave of pessimism about the region's finances.

The top two officials of the IMF -- managing director Michel Camdessus and first deputy Stanley Fischer -- will visit Indonesia next week to "read the riot act" to Suharto, as one Canadian official put it.

Also on his way to Indonesia is U.S. deputy treasury secretary Lawrence Summers and a team of U.S. officials, underscoring heightened fears in the White House about the deepening crisis. Mr. Summers, who arrives today, is also to visit Singapore, Thailand, Malaysia and possibly Japan and China on his hastily arranged trip.

"Our concern in Indonesia, given the continued decline in the currency there, is that steps be taken to institute the important structural reforms that were set out in the IMF program," White House chief economist Janet Yellen said yesterday. "What is key in restoring the markets' confidence is Indonesia's ability to take appropriate measures."

In Jakarta, more calls emerged yesterday for Suharto, 76, to step down, a prospect that was unthinkable a week ago.

The Jakarta Post quoted former cabinet minister Mohammad Sadli as saying a change in government is needed to restore international confidence.

Suharto has ruled Indonesia with an iron grip for more than three decades, tolerating little dissent. Calls for his removal from the presidency have been restricted to marginal or underground groups.

Indonesia's future has not been so bleak since the 1960s, when Suharto, then a military general, took power from founding president Sukarno as the country verged on bankruptcy.

Residents of this teeming capital flocked to supermarkets yesterday for the second day, snapping up vital food stocks to beat feared price rises amid the turmoil.

"I couldn't find any milk for my two children. But I got a little cooking oil and rice, enough for three days only," said one shopper.

On one Jakarta street, hundreds of women crowded behind a truck to buy government-subsidized rice. At a store in East Jakarta, rice prices jumped 30 per cent as merchants took advantage of the stampede to buy.

Suharto ordered that food supplies be distributed quickly to avoid more panic, state secretariat minister Murdiono told reporters.

Diplomats and political analysts have said a food shortage, especially during the fasting month of Ramadan, could trigger the social unrest Suharto's iron rule has essentially contained.

The Indonesian currency actually strengthened a bit against the U.S. dollar yesterday, after losing more than a quarter of it value Thursday. Since July, the rupiah has tumbled 70 per cent against the U.S. dollar, the steepest decline of any Asian currency during the current crisis.

The IMF says it's considering accelerating payments on its loan program -- as it did for South Korea -- but only if the Indonesian government shows renewed sincerity to live by the original deal. Under the plan, the IMF has paid Indonesia $3-billion, and another $3-billion payment is due March 15.=20

But the greater fear now is that a new contagion effect may spread to Singapore, Indonesia's neighbour and key trading partner, as well as to nearby Malaysia, Thailand and the Philippines. South Korea is still negotiating debt-repayment terms with a group of international banks, after agreeing to a bailout in late November.

"Although they have been hit pretty hard, Thailand and the Philippines seem to be making sensible policy changes and getting on with adapting," a Canadian official said. "But the contagion obviously could spread again."

In a televised address yesterday, Malaysian Prime Minister Mahathir Mohamad accused the IMF of "economic colonialism." He called on citizens to curb exports, buy locally produced margarine and grow their own vegetables.

"We would not be able to control our economy and would throw it open to foreign domination, whereby they would come in and buy our banks and companies at cheap prices," Mr. Mahathir said.

The Malaysian currency, the ringgit, has plunged nearly 50 per cent since July, but the country has so far resisted IMF aid.

Former U.S. secretary of state Henry Kissinger warned yesterday that an anti-American backlash could sweep Asia because of tough economic measures imposed by the IMF.

"I think the IMF cure would have been very good if it was applied three years ago," he said in a speech to the World Affairs Council in Seattle.

"We have to be careful the economic realities don't lead to a wave of nationalism and eventually anti-Americanism in which the cure is worse than the disease."

Indeed, the IMF has forced such extreme austerity measures on Thailand, for example, that the country's deputy prime minister is warning that the Thai financial-bailout program is in danger and may soon throw the nation into political turmoil.

Supachai Panitchpakdi, one of the key figures in the Thai rescue program, said during a visit to India that the IMF aid package is causing more harm than good by forcing the government to slash spending while the economy is already reeling. He also harshly criticized Washington for not supporting Thailand, its closest ally in the region, earlier in the crisis.

"We've been one of the greatest friends of the U.S.," he said, pointing to special Thai investment status for Americans. "I'm beginning to doubt whether it was worthwhile."

A year ago it was considered to be one of the world's most successful developing economies. This week, the U.S. agency Moody's downgraded Thailand to junk-bond status for investment. The country's liquidity crunch, with interest rates above 20 per cent, has hit many profitable exporters who cannot secure international-trade finance.