00074910012331338873
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of Recent Developments
Ross H. McLeod
To cite this article: Ross H. McLeod (2000) Survey of Recent Developments, Bulletin of
Indonesian Economic Studies, 36:2, 5-41, DOI: 10.1080/00074910012331338873
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Bulletin of Indonesian Economic Studies
Vol 36 No 2, August 2000, pp. 5–41
SURVEY OF RECENT DEVELOPMENTS
Ross H. McLeod*
Australian National University
SUMMARY
Economic recovery remains hostage to politics, with the diverse coalition
that makes up the cabinet unable to provide strong and effective
government. There has been a high turnover of ministers, and the
governor of the central bank has been placed in detention. Communal
violence continues on a large scale, and law and order appears to be
deteriorating. The economy has been growing modestly, but investment
spending—the most basic indicator of confidence in Indonesia’s nearterm economic prospects—remains far below pre-crisis levels.
Inflation has increased appreciably in recent months because of
significantly faster base money growth. The central bank appears more
concerned to prevent interest rate rises than to meet the money growth
targets in the government’s recent Letters of Intent to the IMF. The rupiah
has been depreciating quite rapidly since late 1999. While this is usually
blamed on growing political uncertainty and continuing social unrest,
concern about weakening monetary discipline is also likely to be a factor.
The disappointing outcome of the recent sale of government shares
in Bank Central Asia calls into doubt the whole approach to bank
restructuring. The new minimum level of capital adequacy is far too low,
and the extent of bank recapitalisation has been overstated by virtue of
the recapitalisation bonds having interest yields well below market rates.
The attempt to devolve power away from the central government
seems bound to run into enormous difficulties. The major problem is the
last minute decision to push many government functions down to the
level of districts/municipalities, bypassing the provinces. In important
respects the push for regional autonomy may prove to be more apparent
than real, with many at the centre reluctant to give up their power and
authority, but in some cases where true devolution does occur it may be
highly disruptive.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
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Ross H. McLeod
POLITICAL BACKGROUND TO ECONOMIC DEVELOPMENTS
Although the economy is emerging hesitantly from the depths of
recession, it will not return to normality in the near future. The severity
and longevity of the crisis can be explained by the fact that it is primarily
political rather than economic. For many years Indonesians awaited, with
what can now be seen as well justified apprehension, the so-called
‘succession’: the transition to a new regime after many years of autocratic
rule by Soeharto. The financial disturbance that began with the floating
of the Thai baht in mid 1997 helped to trigger this transition, but also has
been greatly amplified by it.
There was considerable rejoicing when public pressure succeeded in
forcing Soeharto from office, and again when the parliamentary election
process was completed successfully a little more than a year later, but
the manner of the election of the new president, Abdurrahman Wahid
(Gus Dur), in October 1999 gave cause for concern as to whether the
diverse coalition that resulted would be able to deliver coherent policies
and good government (Mietzner 2000: 39–40). By June 2000, five members
of the first Wahid cabinet and one of their replacements had resigned or
been dismissed, and euphoria had given way to frustrated cynicism and
concern for Indonesia’s future.
The Bank Bali scandal that emerged towards the end of the Habibie
interregnum made it clear that the Soeharto era practice of using public
funds for private and political purposes had not ceased with the demise
of the former president. And after Gus Dur took over the reins of power,
it soon became apparent that Indonesia had yet to acquire a government
and bureaucracy that consistently put the interests of the people and the
nation before those of the political, business and bureaucratic elite.
The Dismissal of Laksamana Sukardi
Of major significance was the April dismissal from office of the Minister
for Investment and State Enterprises, Laksamana Sukardi (SP, 25/4/00).1
Laksamana was the first minister to have brought to light documentary
evidence of the way Soeharto had abused his position in order to bestow
enormous favours on his business associates—specifically, in the case of
the Texmaco conglomerate, which was provided with very large
subsidised loans (Fane 2000: 29–30; Winters 2000). No clear explanation
has been given for the dismissal. At first, the president alleged that the
reason was the inability of Laksamana to work with the economics
coordinating minister, Kwik Kian Gie, and the finance minister, Bambang
Sudibyo, but within days he made a vague, but unsupported, accusation
of involvement in corruption (SP, 25 and 28/4/00). There is a reluctance
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Survey of Recent Developments
7
to accept either explanation. Two alternative theories are: first, that
factions of both the president’s party (PKB) and the vice-president’s party
(PDI-P) are as kindly disposed to Texmaco’s owner as was Soeharto; and,
second, that Laksamana was removed because as Minister for State
Enterprises he had refused to accede to others’ suggestions as to who
should be appointed to top management positions in those firms—
positions that had been used in the past to bestow substantial financial
favours on cronies and the former first family.
The Bulog Scandal
While this episode was still fresh in the public mind, a new scandal
involving the logistics agency, Bulog, hit the headlines. This involved
some Rp 35 billion (about $4 million) from the staff pension fund, which
Bulog’s deputy, Sapuan, asserted he had disbursed after unrelenting
pressure from the president, allegedly to support humanitarian relief
work in Aceh (Kompas, 30/5/00). The president’s ‘masseur’, Suwondo—
who turned out to be an entrepreneur of considerable means for a person
with such a poorly remunerated vocation (SP, 10/6/00)—is alleged to
have played a key role as go-between for the president in seeking access
to non-budgetary funds. Sapuan was arrested, but Suwondo had yet to
be tracked down at the time of writing, as had Leo Purnomo, a staff
member at a new airline—Air Wagon International, established by a
group that included Gus Dur and Suwondo (JP, 12/6/00)—who
reportedly received Rp 5 billion of the missing funds (JP, 8/6/00).
The state secretary, Bondan Gunawan, felt obliged to resign his
position, offering the curious explanation that he was sacrificing himself
in order to prevent the issue being used further to destabilise Gus Dur’s
government (DJN, 29/5/00). Other individuals who somehow came to
find portions of the missing funds in their bank accounts have been able
to return them without yet being charged with any crime, including
businesswoman Siti Farikah and the wife of Suwondo. Some Rp 15 billion
was reported to have found its way to a bank account of the deputy
chairman of PDI-P (JP, 8/6/00); it is not clear if this has been returned.
The president himself has been questioned by the police (DJN, 24/6/00),
but the definitive truth of the matter is yet to emerge. The amount of
money involved is small by comparison with the Bank Bali case, and
trivial relative to the loans received by Texmaco. The dismissal of a
genuinely reformist minister and the imbroglio between the president
and the governor of the central bank (discussed below) are of far greater
moment. But to say that the public has been mightily disappointed with
the cavalier misuse of state funds supposedly held in trust for the
employees of Bulog would be an understatement.
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Ross H. McLeod
If that were not enough, it was soon revealed that the president had
received a gift of $2 million from the Sultan of Brunei (DJN, 12/6/00).
Again, the alleged purpose was charity work in Aceh, but the public was
disquieted to learn that the fruits of this magnanimous gesture were
channelled not through the government system but through a nongovernment organisation led by the chair of PKB in Aceh and affiliated
with Nahdlatul Ulama (NU), the traditionalist Islamic body that Gus Dur
headed until November 1999, shortly after he became president (Adil,
16–22/6/00).
The Detention of the Central Bank Governor
At the same time that the Bulog farce was being played out, the president
was doing all he could to unseat the governor of the central bank, Syahril
Sabirin. With its heavy emphasis on central bank independence, the new
law on Bank Indonesia (BI) enacted in 1999 makes it impossible for the
government to dismiss the governor, except if the latter is convicted of a
criminal offence. Apparently anxious to be rid of Sabirin, the president
appears at first to have secretly offered him an ambassadorship in return
for his resignation (SP, 6/6/00), but when this offer was refused, he
applied heavy pressure by stating openly that the governor had been
corruptly involved in the Bank Bali scandal (JP, 8/6/00).
But there seems to have been another motive for wanting to remove
Sabirin from his post. The government has been in the process of replacing
the top management of the state banks, and Gus Dur’s preferred candidate
for president director of Bank Rakyat Indonesia failed to pass the ‘fit and
proper’ test applied by BI (DJN, 6/6/00). The president made his
displeasure known to the public, as a result of which the Sabirin case has
acquired a disturbing similarity to the dismissal of Laksamana.
The attorney general formally announced that Sabirin was a ‘suspect’
(rather than a ‘witness’) in the Bank Bali case, apparently hoping that
this would suffice to persuade him to step aside, but this attempt also
failed (JP, 6/6/00). Eventually the governor was taken in for questioning,
and placed in detention; Senior Deputy Governor Anwar Nasution took
over as acting governor, pending resolution of the charges against Sabirin
by the courts (DJN, 22/6/00). The spectacle of the president in open
conflict with the governor of the central bank has done little to reassure
either the public or the investment community that the stability of the
financial system can be taken for granted.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
Survey of Recent Developments
9
Policy Making Outside the Bureaucracy
The bureaucracy seems to have made little contribution to resolving the
economic crisis. This is hardly surprising in view of Lindsey’s comment
(2000: 287) that ‘… by the end of Soeharto’s rule in 1998, the bureaucracy
had largely ceased to function as any form of rational administration’,
because of ‘the almost complete subordination of the administrative
branch of government to its executive …’. The president’s lack of
confidence in his economics coordinating minister and other economics
ministers (two of whom, including Laksamana, have been removed from
the cabinet) and in the policy advice available from their largely ineffectual
departments has led to a proliferation of advisory groups. Most prominent
is the National Economics Council (DEN)—a group of about a dozen
academic economists, former ministers in various fields of economics,
and representatives of business. Less prominent, and perhaps having
less influence because of its perceived self-interested stance, is the
National Council for Business Development (DPUN), a group of about
18 prominent business people. Working in the background is the more
recently created Assistance Team, led by the foremost technocrat from
the New Order, the seemingly ageless Professor Widjojo Nitisastro,
assisted by two young and increasingly prominent economists, Dr Sri
Mulyani (who is also active as DEN Secretary) and Dr Faisal Basri, and
one big business representative, Alim Markus. Finally there is a
monitoring team led by the formerly high profile economics consultant
Rizal Ramli (now head of Bulog), which meets with the president on a
weekly basis—among other things to report on the performance of various
ministers. All of this can do little but reinforce the impression of a highly
fragmented government with no clear sense of direction in formulating
economic policy.
Social Unrest and the Military
Meanwhile the military, which, it had been hoped, might have begun to
bring peace to various troubled parts of the archipelago following the
removal of the former Co-ordinating Minister for Political Affairs and
Security, Wiranto, still proves incapable of doing so. It has been subjected
to various indignities unheard of in the Soeharto era, such as the burning
of its vehicles and abuse of its officers by students in Jakarta (JP, 29/5/
00), and public questioning of former top officers about its role in episodes
such as the killing of Muslim activists in Tanjung Priok in 1984 (DJN, 3/
5/00), the violence in East Timor before and after the vote for
independence, and the repression of the separatist movement in Aceh
(JP, 30/11/99). But although 24 soldiers (and one civilian) were convicted
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Ross H. McLeod
of murdering some 57 villagers in Aceh in July 1999—and sentenced to
up to 10 years’ imprisonment—no highly ranked officer has been charged,
much less punished, for any wrongdoing (WSJ, 18/5/00).
Two bomb blasts occurred in the city of Medan in May, including one
in a church that caused scores of injuries (DJN, 29/5/00). But the principal
focus of social unrest recently has been in Maluku, where several
thousands of individuals have been killed, injured, or driven from their
homes in communal violence pitting Christians against Muslims. Not
only have the armed forces been unable to put a stop to the carnage (DJN,
21/6/00): they have also failed to prevent the emergence of a Muslim
militia known as Laskar Jihad, which openly trained its recruits near
Jakarta before sending them off to Maluku to wage war on the Christian
community in defiance of Gus Dur’s pleas (FEER, 6/7/00). Worse still,
many believe that elements of the military are participating actively in
the violence—on both sides—including supplying arms to the
protagonists. The announcement by Gus Dur of a state of civil emergency
in Maluku (Jawa Pos, 27/6/00) has failed to bring calm to the province,
and there is a growing perception that social unrest, bombings and the
like are being orchestrated by those anxious to keep the president off
balance, and to cripple the government’s attempts to act against those
who were involved in corruption and other crimes during the Soeharto
era.
Slow Progress with Reform in the Legal Sphere
Nor has there been any improvement in the functioning of the police
force. On the contrary: especially in Jakarta there is concern about the
steady deterioration of law and order (SP, 20/6/00). People are more
and more wary of travelling around at night, and robberies in broad
daylight are commonplace. Frustration with the incapacity of the police
to protect the public has seen the emergence of an extreme form of street
justice, in which robbers who happen to be caught in the act are beaten,
doused with fuel and then set on fire by people in the vicinity (JP,
11/6/00). The Jakarta police chief bemoaned the barbarity of these acts
(DJN, 12/6/00), but if the police cannot improve their performance, more
of the same is to be expected: there is a demand for law enforcement, and
if the public sector cannot provide it, it will be ‘privatised’.
The other major concern with law enforcement is the court system.
Here, too, hopes for reformasi remain unfulfilled. As former Supreme Court
judge Adi Andojo Soetjipto (2000: 273) put it (in 1999), ‘The practice of
corruption and collusion continues in all courts to this day. … Judges
openly practice extortion from defendants and others involved in
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Survey of Recent Developments
11
disputes.’ Ironically, this is even more of a problem now than it had been
under Soeharto, for in that era Soeharto and his appointees as governors
and bupati (district chiefs) were in effect the ultimate source of authority,
and people rarely bothered to use the courts when those at the top had
made it known who was to be the winner in any given dispute. With
nobody now playing this Soeharto role, the courts are being called on to
do much more than before, especially in the commercial area. But this
has served only to increase the opportunities for extracting bribes from
parties in dispute, and to expose the atrophy of legal skills in the judicial
system during the long years when they became largely irrelevant.
Nowhere is all this more evident than in the new Commercial Courts,
from which a stream of highly questionable judgements has issued since
their establishment in 1998. And no single entity has suffered as greatly
as the Indonesian Bank Restructuring Agency (IBRA), which has lost all
but a tiny handful of the scores of cases it has brought against defaulters,
apparently because of a very understandable reluctance on the part of its
officials to compete by offering bribes (using public money) to the judges
hearing these cases. The proposal to appoint ad hoc judges to the courts
in order to overcome the lack of expertise in the financial area and to
raise standards of probity has as yet come to nothing, presumably because
of resistance from incumbent judges and corrupt bureaucrats who prefer
to keep the system as it is. Likewise, other initiatives intended to reform
the judiciary (Fane 2000: 26–7) are yet to have any discernible impact.
There are hopes that the parliament (DPR) may make a significant
contribution to the cause of law reform—and indeed, reform more
generally—by appointing capable individuals of high integrity to a
number of current vacancies on the Supreme Court, including the position
of Chief Justice. But these appointments have been awaited for some
time, and there are no doubt strong forces at work supporting a
continuation of the status quo. Without an infusion of capable, reformminded judges, it is unlikely that public trust in the courts can be rebuilt.
The Role of Parliament
Like the courts, the DPR itself is an institution that atrophied under
Soeharto. Elections were a farce, and the legislature did virtually nothing
to ensure accountability of the executive to the people. Thus, although
the DPR is now far more active than it was during the New Order, its
activism is not always well directed. It is quick to embrace populism at
the expense of good policy, for example, opposing increases in prices
under government control, and it has also hindered the recapitalisation
of failed banks by its opposition to setting market-determined interest
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Ross H. McLeod
rates on recapitalisation bonds (see below). In the case of IBRA, the DPR
has been critical of attempts to negotiate settlements with defaulters
involving debt write-offs, even though this is often the least costly option
in the attempt to recover losses from the government’s bailout of the
banking system.
It is not surprising that the DPR responds to public pressure in
opposition to increases in prices. The public are well aware that they will
be called upon for years to come to bear the enormous costs of bailing
out the banking system, whether in the form of higher taxes or reduced
provision of government services. They also vaguely comprehend that
many of the individuals who are responsible for these costs (through
their failure to repay loans from the banks) remain very well off. They
correctly infer from this that an enormous wealth transfer is now in
progress at their expense—whether to cover losses that should have been
borne by those who undertook unsound investments, or to cover wilful
default on a grand scale facilitated by a corrupt legal system. It is hardly
surprising that members of the public resist paying more for fuel,
electricity and public transport in such circumstances.
In at least one instance where the parliament could have made an
important contribution, the Texmaco case, it failed to do so. As Fane (2000:
20) noted, after extraordinarily brief consideration of the case the DPR
concluded that there was nothing untoward, and that the former regime
had acted correctly in providing a huge amount of subsidised funding
for the conglomerate. Few impartial observers were satisfied with the
argument that the company was ‘a national asset … entitled to
government assistance in time of crisis’ (JP, 1/12/99), not least because it
would have been possible to keep the company in operation without
bailing out its owners, and because the details of how the funds were
actually used remained unclear. Ironically, the attorney general’s decision
eventually to halt investigation into the case in May 2000 caused heated
debate in the DPR (JP, 27/5/00).
Parliamentary activism extends also to calling on the new president
to account for his performance in a meeting of the People’s Consultative
Assembly (MPR) in August, only 10 months after taking office. By July
this had become the focus of political prognostications. Could Gus Dur
survive the session? If so, would he make drastic changes to his cabinet?
Or might he be forced to relinquish his position? What kind of government
might replace him? How would the Muslim parties rationalise the
prospect of Vice-President Megawati Sukarnoputri as president (as
required by the Constitution if a serving president leaves office), given
that they had argued previously that a woman could not take this
position? While keeping presidents accountable for their actions is, no
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Survey of Recent Developments
13
doubt, desirable, the possibility of frequent changes in the presidency
injects even greater uncertainty into politics, and this is something
Indonesia can ill afford at a time when it is trying to convince the business
community that it is safe to resume normal activity.
MACROECONOMIC CONDITIONS
Economic Growth
The economy bottomed out in the last three quarters of 1998, at a level of
output similar to that recorded during 1995. Modest growth has occurred
since then, such that output in the March quarter of 2000 was about 5%
higher than during the depths of the recession (figure 1). With population
growing by about 8% since Q1 1995, the implied fall in real per capita
output is less than 3%. This is far less drastic than the 30% fall that some
FIGURE 1 Major Sectors’ Growth Performance
(1993 prices; March 1995 = 100)
160
140
120
100
80
60
40
20
0
Mar95
Sep95
Mar96
Sep96
Mar97
Sep97
Mar98
Sep98
GDP
Manufacturing
Construction
Trade
Source: CEIC Asia Database.
Mar99
Sep99
Mar00
Food crops
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Ross H. McLeod
TABLE 1 Output of Selected Manufacturing Subsectors
(March 1995 = 100)
1997 Q1
Q2
Q3
Q4
1998 Q1
Q2
Q3
Q4
1999 Q1
Q2
Q3
Q4
Processed Food,
Beverages
& Tobacco
Wood
Iron &
Steel
Products
Automotive
Textiles &
Footwear
130
134
179
188
163
138
171
158
159
163
166
168
108
108
104
97
95
81
71
64
64
66
68
72
105
102
107
117
96
75
68
76
71
71
75
76
117
132
104
87
73
54
48
34
36
42
49
58
112
112
105
106
100
96
85
89
89
93
95
97
Source: As for figure 1.
observers prefer to highlight, which is based on GDP measured in
irrelevant current dollar prices rather than constant rupiah prices.
Nevertheless, real output is now some 37% less than it would have been
if the pre-crisis average growth rate of 7.5% p.a. had been maintained (cf.
Pardede 1999: 9). Seen from this perspective, the crisis has been costly
indeed.
Growth performance varies widely across major sectors of the
economy. Construction fell most rapidly and by proportionately the
greatest amount—about 45% in the year to mid 1998—but it has since
been growing at nearly 12% p.a. from this low base. Wholesale and retail
trade also fell precipitously—by some 31%—in calendar 1998, and has
been growing at about 8% subsequently. Output of the oil and gas sector
and the general government sector has been fairly stable during the crisis,
as has that of food crops (seasonal fluctuation aside). It is surprising,
however, that after bouncing back in 1999, recorded food crop output in
the first quarter of 2000 was actually a little lower than in 1998 at the
height of the El Niño drought. Since climatic conditions have been
favourable, there is scepticism as to the accuracy of the Q1 2000 agriculture
figures. The sector least affected overall by the crisis is manufacturing,
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Survey of Recent Developments
15
FIGURE 2 Major Expenditure Categories
(1993 prices; March 1995 = 100)
160
140
120
100
Consumption
Investment
80
60
40
20
0
Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar97
97
97
97
98
98
98
98
99
99
99
99
00
Source: As for figure 1.
which, even after contracting considerably in the first half of 1998, never
fell below its Q1 1995 level, and has also been growing at about 8% p.a.
subsequently.
When manufacturing sector performance is disaggregated, however,
it appears that the dominant processed food, beverages and tobacco
subsector has generated the bulk of this success (table 1). Its output hardly
declined as a result of the crisis (although strong seasonal volatility
obscures the picture), and was running 62% higher in Q1 2000 than in Q1
1995—in stark contrast to all other major sectors. Output of the automotive
subsector, in particular, fell by about three-quarters from mid 1997 through
the end of 1998, and although it has grown quite rapidly since then, in
Q1 2000 it remained 40% below its level five years earlier. Other subsectors
such as wood products, iron and steel products, cement and textiles,
relying heavily on depressed sectors of the domestic market, are still
operating at low levels of output, although all have recovered somewhat
from the low points reached in 1998.
From the expenditure perspective, there is a sharp contrast between
household consumption and investment (figure 2), reflecting the much
greater degree of discretion that attaches to timing of the latter: baldly
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Ross H. McLeod
stated, people have to eat, but businesses and government can choose
not to expand productive capacity if circumstances are not congenial.
Although consumption exhibited some volatility early in the crisis—
partly related to seasonal factors—the extent of the decline from its trend
level was never more than 10%, and it has been growing slowly since Q3
1998. By contrast, investment (i.e. gross fixed capital formation) fell
steadily for almost two years from immediately after the crisis started, to
about half its initial volume. The levels recorded more recently have been
significantly higher than the lowest ebb, but the promising spurt in Q4
1999 was not maintained in Q1 2000.
The data presented above are consistent with a general impression
that the business community is ‘marking time’; very few firms seem
interested in undertaking any major new investments. Ways are being
found to adjust to low levels of domestic demand in many markets, to
cut costs by substituting cheaper inputs (including locally produced
import substitutes), to postpone the repayment of existing obligations,
and to adjust to the lack of new loans available from banks. In short,
most decision makers in the private sector would probably agree with
the economics coordinating minister, Kwik Gian Gie, who was widely
criticised for saying, reportedly, ‘If I were a foreign investor, I wouldn’t
come to Indonesia. The law enforcement is not there, but not only that,
the whole thing is so confusing’ (DJN, 11/5/00).
Forecasts of overall growth in 2000 range from a low of 1.5% in the
central statistics agency’s (BPS) ‘worst case scenario’ (box 1)2 (JP, 17/5/00)
through 3–4% at BI (DJN, 6/6/00), to the president’s 5.5% ‘if we are really
lucky’(DJN, 8/6/00), and economics commentator Sjahrir’s 6% (JP, 26/
6/00). The international financial institutions and most commentators
appear to accept 4% as realistic for the time being. The wide dispersion
of these forecasts highlights their arbitrariness, which is inevitable given
the current high level of political uncertainty.
Inflation and Monetary Conditions
Prices have increased only slightly over the last year, with the consumer
price index (CPI) just 2.1% higher in June 2000 than in June 1999.
Nevertheless monthly rates of inflation have been much higher during
the June quarter—ranging from 6 to 11% p.a.—causing some concern.
As Pardede (1999: 14–15) pointed out, the huge inflationary surge in 1998
was preceded by an explosion in the growth rate of base money, and
came to a sudden halt virtually as soon as the central bank began to bring
this money growth under control. This suggests that we should look to
monetary policy for clues as to why inflation has been accelerating
recently.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
Survey of Recent Developments
BOX 1 BPS AS ECONOMIC FORECASTER
BPS’s involvement in economic forecasting is a matter of some
concern (DJN, 21/5/00). Other countries’ national statistics
agencies stay clear of such involvement, for reasons that also apply
in the Indonesian context. First, forecasting involves conflict of
interest. Having made a forecast, the agency will inevitably feel
under some pressure to produce ex post data that demonstrate, or
at least do not call into question, its forecasting capabilities.
Second, growth rate and inflation rate forecasts are politically
sensitive numbers if they are produced by a government agency,
and thus are capable of drawing BPS—which ideally should be
above politics—into political controversies. Thus for it even to
raise the possibility (much less to predict) that year 2000 growth
might be well below the official target immediately drew criticism
from many who accused it of adding to general concerns about
the process of economic recovery and therefore possibly helping
to bring about just this unwanted outcome. Moreover, the
comment could be interpreted as a veiled criticism of the
government’s performance in managing the economy. Third, with
limited resources, the statistics agency should concentrate its
attention on producing and disseminating the best possible and
most useful permanent record of what has happened—not guesses
about what will happen, which have little or no lasting value.
In defending BPS against the criticism that greeted its worst
case forecast, outgoing BPS chief Sugito Suwito is reported to have
argued that Law 16 of 1997 on Statistics gives BPS authority to
make predictions based on empirical data, ‘but not based on
economic models’ (SP, 17/5/00). In fact, empirical data can only
describe the past, and cannot predict the future other than by using
some kind of model, no matter how simple. This point of logic
aside, if this is a correct interpretation of the Law, then perhaps it
should be changed.
17
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
18
Ross H. McLeod
FIGURE 3 Base Money Growth (6-Month) and Exchange Rate
(June 1999 = 100)
Base money
growth
Exchange
rate
125
250
100
200
Exchange rate (Rp/$)
75
150
50
100
Base money growth (% p.a.)
25
0
Jun-98
50
0
Sep-98 Dec-98 Mar-99 Jun-99
Sep-99
Dec-99 Mar-00
Source: As for figure 1.
Figure 3 presents annualised base money growth rates for the
preceding six-month period. On this basis, it shows that the downward
momentum of the money growth rate was lost in about August 1999.
The six-month growth rate quadrupled between August 1999 and
November 1999, and more than doubled again by January 2000. By May
2000 it was approaching five times the rate of mid 1999, at 27% p.a. (The
spike in December 1999 can be ignored: it is largely the consequence of
the now all but forgotten Y2K bug, which saw Indonesian banks holding
vastly increased amounts of cash and clearing deposits at the end of 1999
for precautionary reasons.)
Base money is measured differently in the government’s Letters of
Intent (LOIs) to the IMF and in the balance sheet of the monetary
authorities, on which the above comments are based, making direct
comparison of absolute levels impossible. Nevertheless if we compare
the implied growth rates in the LOIs, a similar conclusion about loss of
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
Survey of Recent Developments
19
TABLE 2 The CPI and Its Major Components
(June 1999 = 100)
Sep-99
CPI
Food
Processed food, beverages
& tobacco
Housing
Clothing
Health
Education, recreation & sports
Transport & communication
Dec-99
Mar-00
May-00
97
89
99
93
100
93
102
92
101
100
101
101
104
100
102
101
103
101
105
101
102
103
106
102
105
102
105
106
107
104
107
106
Source: As for figure 1.
control of money growth emerges. The targeted increase in base money
from August 1999 through March 2000 in the July 1999 LOI was 7.8%,
whereas the actual increase (as recorded in the May 2000 LOI) was 12.8%.
And the recorded increase for the 12 months to May 2000 was 18.7%,
which may be compared with targeted growth rates of 13.4% p.a. in the
year to March 2000 (March 1999 LOI), and just 8.6% p.a. in the period
January through December 2000 (May 2000 LOI).
It is of interest to note that the unprocessed food component of the
CPI (dominated by rice) was much lower in June 2000 than a year earlier,
following a large decline early in this period (table 2). It is important not
to jump from this observation to the conclusion that inflation would have
been higher if not for this fortuitous decline in rice prices, as this begs the
question as to whether price rises in the other categories would have
been the same if rice prices had been rising, not falling. The monetarist
view is that declines in the value of money (which is another way of
referring to increases in the price level) depend significantly on the rate
at which the supply of money grows. From this it follows that for a given
growth rate of money, declines in prices of particular goods will tend to
cause increases in prices of other goods. To put it another way, relative
price changes are not inflationary or deflationary.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
20
Ross H. McLeod
TABLE 3 Selected Rupiah Exchange Rates
(June 1999 = 100)
Jun–99
Sep–99
Dec–99
Mar–00
Apr–00
May–00
Jun–00
USD
EUR
AUD
JPY
100
125
106
113
118
129
130
100
129
104
105
104
117
120
100
123
105
104
104
111
117
100
142
126
133
132
145
147
Sources: CEIC Asia Database; PACIFIC Exchange Rate Service.
Thus if inflation is to be kept in check, the central bank will need to
exercise more careful control of its monetary liabilities than it has been
doing in recent months. With its independence now enshrined in law, it
can no longer blame government interference for its failure to keep
monetary policy on track.
Rupiah Exchange Rates
Figure 3 also shows that the strong recovery of the rupiah in the latter
half of 1998 has not been sustained; by the end of June 2000 the rupiah
price of dollars was 30% higher than in mid 1999. There was continued
volatility in 1999, albeit not of the same order as previously, with the
strongest point being recorded in mid 1999. After the election of Gus Dur
in October 1999 the rupiah again strengthened, but this was short lived,
and there has been a steady decline subsequently.
The rupiah is not the only currency to depreciate against the dollar in
recent times, so its decline against some currencies (such as the euro and
the Australian dollar) was relatively slight until about April 2000 (table
3). But there has been a significant decline subsequently against even
these currencies. Moreover, depreciation of the rupiah against the yen
has been even greater than that against the dollar; this is significant
because Japan is Indonesia’s most important single trading partner, and
an important source of foreign loans.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
Survey of Recent Developments
21
The impact of depreciation of the currency is multi-faceted. Tradable
goods producers will gain from increased competitiveness, especially
relative to Japan. On the other hand, those with unhedged borrowings
denominated in dollars and yen will suffer wealth losses. Having said
this, it is not clear to what extent borrowers have reduced their exchange
rate risk exposure in recent months, having learned in the most direct
possible manner of the considerable danger of not doing so in 1997–98.
There is now a widespread perception that continued weakness of
the currency can be explained by psychological factors, political
uncertainty and social disharmony. For example, the then senior deputy
governor of BI, Anwar Nasution, was reported as saying that ‘the fate of
the rupiah will depend on developments in the economy, politics and
security. If we continue to fight and burn other people’s property [the
rupiah will continue to weaken]’ (JP, 24/5/00). On the other hand,
economics coordinating minister Kwik Kian Gie could offer no
explanation for why the rupiah remained weak, given that ‘all
macroeconomic and monetary aggregates are showing positive and
encouraging development’ (DJN, 12/6/00).
Although political uncertainty is doubtless an important influence
on the value of the rupiah, it should be noted that its weakening since
October 1999 corresponds closely to the slackening of monetary control
already observed during this period (but apparently not noticed by
Minister Kwik). It is impossible to disentangle the effects of political
uncertainty and current monetary conditions on the exchange rate, but it
is important to realise that they are related. A key element of this
uncertainty is the future course of monetary policy itself: if there is an
increasingly widespread expectation of significant weakening of
monetary discipline, this will encourage a shift out of rupiah into foreign
currency, resulting in depreciation. Central banks have no direct control
over expectations about what they might do in the future, of course, but
they can certainly have some influence by virtue of their present conduct
of monetary policy. The failure of BI to keep to the base money growth
targets in the LOIs in recent months is all too reminiscent of early 1998,
when such targets were repeatedly exceeded by wide margins—with
disastrous consequences for the exchange rate. This can only strengthen
fears that monetary policy is not properly under control, and suggests
that the central bank should carry at least some of the blame for continuing
depreciation of the rupiah.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
22
Ross H. McLeod
What Should the Central Bank Be Doing?
Two questions being asked repeatedly of the central bank are: what is
being done to stabilise or strengthen the rupiah? and what is going to
happen to the interest rate on BI certificates of deposit (SBIs)? BI finds
itself facing a number of policy options, none of them congenial. The
extent to which it can sell off international reserves to support the rupiah
is limited, since commitments to the IMF do not allow significant
reductions in these reserves. Besides, the government has a nominal
commitment to a floating exchange rate policy, however vaguely this is
defined (McLeod 1999: 149), which would be incompatible with
significant intervention in the foreign exchange market. On the other
hand, if it moves to strengthen the currency indirectly by increasing SBI
rates, it increases its own costs, and it increases the government’s cost of
servicing the enormous volume of bonds it has issued to recapitalise the
banking system, since the interest rate for most bonds is the same as that
on SBIs. Both factors have a substantial impact on the budget, directly or
indirectly.
The official answer to these questions was provided by the then BI
governor, Syahril Sabirin, in a parliamentary hearing on 12 June 2000. BI
‘would continue to intervene to prop up the rupiah’, including raising
interest rates on SBIs (JP, 13/6/00). A more appropriate answer would
have been to say that BI has no target for either the exchange rate or the
level of interest rates, and that these two financial prices are being left to
be determined by the markets—in the same way that the prices of shares,
or bananas, for example, are determined. At the same time, it would be
necessary to emphasise that this would not mean that the central bank
was doing nothing. On the contrary, what it is (or should be) doing is
controlling the growth of its own monetary liabilities—base money—
and all financial prices are being influenced, indirectly, through this
instrument. To put it differently, the most effective means available to
the central bank of contributing to general stabilisation is to do what the
current LOI requires it to do: stick to a clear and sensible target growth
rate for base money (currently about 7% p.a.).3 By contrast, there are no
targets in the LOI for the exchange rate or interest rates, for good reason:
in implementing monetary policy, less is more.
The central bank cannot control SBI rates independently of base
money. The issue and redemption of SBIs is practically the only means it
has of controlling base money, and it will not be able to issue appropriate
quantities if it is not prepared to allow rates to be determined by the
interaction of supply and demand.4 Indeed, the recent tendency for base
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Survey of Recent Developments
23
money to grow far more rapidly than the current LOI calls for suggests
that reluctance to allow upward adjustment of these rates has once again
been compromising the LOI base money growth targets.
Alternative Monetary Policies
Frustration with the steady decline of the rupiah appears to have led to a
‘brief exchange of views’ on the possibility of introducing capital controls
at a meeting between the president and his economic ministers and
advisers at the end of May (DJN, 1/6/00). But there was little support for
the idea, and it was officially laid to rest a few days later at a meeting
between the president and the new managing director of the IMF, Horst
Koehler (JP, 6/6/00). Another radical alternative for stabilising monetary
conditions—a currency board, which had been close to adoption shortly
before Soeharto was forced from office in May 1998—has reappeared in
recent times, with the publication of an article advocating such a course
in the international press (AWSJ, 15/5/00). The suggestion was quickly
followed by a strongly voiced counter attack in a letter to that newspaper
by former BI governor Soedradjad Djiwandono (AWSJ, 26/5/00). By
contrast, Schuler’s (1999) suggestion of dollarisation for Indonesia seems
to have fallen on deaf ears, at least for the time being.
At the time the currency board proposal was endorsed by Soeharto,
the extraordinarily vociferous domestic and international opposition to
it was not to the currency board concept per se, but was driven, rather, by
the conviction that the proposal was a subterfuge by Soeharto to enable
him to prolong the looting of the central bank that was already under
way. In the event, of course, that looting continued regardless, and it is
sobering to contemplate that the ultimate damage might have been less
if the proposal had not been blocked. The Soeharto factor hardly seems
relevant any longer, however, with the former president apparently
seriously weakened by two strokes, being subjected to repeated (albeit
apparently fruitless) questioning in relation to corruption allegations by
the attorney general’s office, and having been placed first under city
detention and then, in late May, under house arrest (Kompas, 30/5/00).
The re-emergence of lax monetary policy implementation and
renewed weakening of the currency suggests that it might be worthwhile
now to re-examine the currency board proposal. On the earlier occasion
it was almost universally believed that the currency board exchange rate
was to be fixed at Rp 5,000–5,500/$. On this basis, the currency board
may well have failed. But Stephen Hanke, who brought the idea to
Soeharto, asserts that his intention was always for the rate to be
determined by the market, not by the government (Broening 1998; Hanke
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
24
Ross H. McLeod
1998: 32–3). His proposal was to announce the intention to establish a
currency board, and then to allow the rupiah to float freely without any
form of intervention in the market by the central bank for a period of
perhaps a month; the chosen rate would be that which emerged from
this market driven process by the end of the free-float period. Individuals
close to the policy making action at the time seem in little doubt that
Soeharto’s intention was to fix the rate within the range just mentioned,
regardless of Hanke’s position, but if the currency board proposal is to
be rethought now, this important detail concerning the process for setting
the rate will need to be taken into account.
BANK RECAPITALISATION AND
THE SAGA OF BANK CENTRAL ASIA
In thinking about the collapse of the banking system and the damage
this has done to the economy (box 2), it is worth noting that although
this is widespread in terms of the number of banks that have failed, to a
large extent the losses are concentrated amongst the state banks and a
small number of private banks—including Bank Central Asia (BCA), now
majority owned by IBRA on behalf of the government. The bank was
taken over in May 1998 after Soeharto’s resignation triggered a run on its
deposits, but not before Bank Indonesia had provided a staggering
amount of liquidity support—some Rp 32 trillion (Republika, 19/9/98),
equivalent to about $4 billion at an exchange rate of Rp 8,000/$.
Since BCA was owned by various members of Soeharto’s family and
by long-time crony Liem Sioe Liong, it immediately came under physical
attack by opponents of the regime when Soeharto was forced by public
pressure to step down in May 1998. It was soon taken over by the
government, and eventually became part of IBRA’s portfolio, pending
de-nationalisation.
In its July 1999 LOI, the government had announced its intention to
sell BCA during the last quarter of 1999. There was no suggestion then
that this would be anything less than 100% divestment, but when the
offer of shares to the general public finally took place in late May 2000,
only 22.5% of IBRA’s shares were offered for sale. Presumably this
reflected the government’s reluctance to allow too many of IBRA’s assets
to be sold off in ‘fire sale’ conditions (Business Times, 28/6/99), although
whether it will be able to realise significantly greater amounts by
postponing divestment is moot. Even with this small volume of shares
the amount raised from the sale was somewhat less than had been hoped
for, with the offer price of Rp 1,400 per share being near the bottom end
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
Survey of Recent Developments
OF THE
25
BOX 2 ALTERNATIVE MEASURES
COST OF BAILING OUT THE BANKING SYSTEM
Fane (forthcoming) suggests that the probable (stock) cost of the
government’s commitment to bail out depositors and other
creditors of the banking system (
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of Recent Developments
Ross H. McLeod
To cite this article: Ross H. McLeod (2000) Survey of Recent Developments, Bulletin of
Indonesian Economic Studies, 36:2, 5-41, DOI: 10.1080/00074910012331338873
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Bulletin of Indonesian Economic Studies
Vol 36 No 2, August 2000, pp. 5–41
SURVEY OF RECENT DEVELOPMENTS
Ross H. McLeod*
Australian National University
SUMMARY
Economic recovery remains hostage to politics, with the diverse coalition
that makes up the cabinet unable to provide strong and effective
government. There has been a high turnover of ministers, and the
governor of the central bank has been placed in detention. Communal
violence continues on a large scale, and law and order appears to be
deteriorating. The economy has been growing modestly, but investment
spending—the most basic indicator of confidence in Indonesia’s nearterm economic prospects—remains far below pre-crisis levels.
Inflation has increased appreciably in recent months because of
significantly faster base money growth. The central bank appears more
concerned to prevent interest rate rises than to meet the money growth
targets in the government’s recent Letters of Intent to the IMF. The rupiah
has been depreciating quite rapidly since late 1999. While this is usually
blamed on growing political uncertainty and continuing social unrest,
concern about weakening monetary discipline is also likely to be a factor.
The disappointing outcome of the recent sale of government shares
in Bank Central Asia calls into doubt the whole approach to bank
restructuring. The new minimum level of capital adequacy is far too low,
and the extent of bank recapitalisation has been overstated by virtue of
the recapitalisation bonds having interest yields well below market rates.
The attempt to devolve power away from the central government
seems bound to run into enormous difficulties. The major problem is the
last minute decision to push many government functions down to the
level of districts/municipalities, bypassing the provinces. In important
respects the push for regional autonomy may prove to be more apparent
than real, with many at the centre reluctant to give up their power and
authority, but in some cases where true devolution does occur it may be
highly disruptive.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
6
Ross H. McLeod
POLITICAL BACKGROUND TO ECONOMIC DEVELOPMENTS
Although the economy is emerging hesitantly from the depths of
recession, it will not return to normality in the near future. The severity
and longevity of the crisis can be explained by the fact that it is primarily
political rather than economic. For many years Indonesians awaited, with
what can now be seen as well justified apprehension, the so-called
‘succession’: the transition to a new regime after many years of autocratic
rule by Soeharto. The financial disturbance that began with the floating
of the Thai baht in mid 1997 helped to trigger this transition, but also has
been greatly amplified by it.
There was considerable rejoicing when public pressure succeeded in
forcing Soeharto from office, and again when the parliamentary election
process was completed successfully a little more than a year later, but
the manner of the election of the new president, Abdurrahman Wahid
(Gus Dur), in October 1999 gave cause for concern as to whether the
diverse coalition that resulted would be able to deliver coherent policies
and good government (Mietzner 2000: 39–40). By June 2000, five members
of the first Wahid cabinet and one of their replacements had resigned or
been dismissed, and euphoria had given way to frustrated cynicism and
concern for Indonesia’s future.
The Bank Bali scandal that emerged towards the end of the Habibie
interregnum made it clear that the Soeharto era practice of using public
funds for private and political purposes had not ceased with the demise
of the former president. And after Gus Dur took over the reins of power,
it soon became apparent that Indonesia had yet to acquire a government
and bureaucracy that consistently put the interests of the people and the
nation before those of the political, business and bureaucratic elite.
The Dismissal of Laksamana Sukardi
Of major significance was the April dismissal from office of the Minister
for Investment and State Enterprises, Laksamana Sukardi (SP, 25/4/00).1
Laksamana was the first minister to have brought to light documentary
evidence of the way Soeharto had abused his position in order to bestow
enormous favours on his business associates—specifically, in the case of
the Texmaco conglomerate, which was provided with very large
subsidised loans (Fane 2000: 29–30; Winters 2000). No clear explanation
has been given for the dismissal. At first, the president alleged that the
reason was the inability of Laksamana to work with the economics
coordinating minister, Kwik Kian Gie, and the finance minister, Bambang
Sudibyo, but within days he made a vague, but unsupported, accusation
of involvement in corruption (SP, 25 and 28/4/00). There is a reluctance
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
Survey of Recent Developments
7
to accept either explanation. Two alternative theories are: first, that
factions of both the president’s party (PKB) and the vice-president’s party
(PDI-P) are as kindly disposed to Texmaco’s owner as was Soeharto; and,
second, that Laksamana was removed because as Minister for State
Enterprises he had refused to accede to others’ suggestions as to who
should be appointed to top management positions in those firms—
positions that had been used in the past to bestow substantial financial
favours on cronies and the former first family.
The Bulog Scandal
While this episode was still fresh in the public mind, a new scandal
involving the logistics agency, Bulog, hit the headlines. This involved
some Rp 35 billion (about $4 million) from the staff pension fund, which
Bulog’s deputy, Sapuan, asserted he had disbursed after unrelenting
pressure from the president, allegedly to support humanitarian relief
work in Aceh (Kompas, 30/5/00). The president’s ‘masseur’, Suwondo—
who turned out to be an entrepreneur of considerable means for a person
with such a poorly remunerated vocation (SP, 10/6/00)—is alleged to
have played a key role as go-between for the president in seeking access
to non-budgetary funds. Sapuan was arrested, but Suwondo had yet to
be tracked down at the time of writing, as had Leo Purnomo, a staff
member at a new airline—Air Wagon International, established by a
group that included Gus Dur and Suwondo (JP, 12/6/00)—who
reportedly received Rp 5 billion of the missing funds (JP, 8/6/00).
The state secretary, Bondan Gunawan, felt obliged to resign his
position, offering the curious explanation that he was sacrificing himself
in order to prevent the issue being used further to destabilise Gus Dur’s
government (DJN, 29/5/00). Other individuals who somehow came to
find portions of the missing funds in their bank accounts have been able
to return them without yet being charged with any crime, including
businesswoman Siti Farikah and the wife of Suwondo. Some Rp 15 billion
was reported to have found its way to a bank account of the deputy
chairman of PDI-P (JP, 8/6/00); it is not clear if this has been returned.
The president himself has been questioned by the police (DJN, 24/6/00),
but the definitive truth of the matter is yet to emerge. The amount of
money involved is small by comparison with the Bank Bali case, and
trivial relative to the loans received by Texmaco. The dismissal of a
genuinely reformist minister and the imbroglio between the president
and the governor of the central bank (discussed below) are of far greater
moment. But to say that the public has been mightily disappointed with
the cavalier misuse of state funds supposedly held in trust for the
employees of Bulog would be an understatement.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
8
Ross H. McLeod
If that were not enough, it was soon revealed that the president had
received a gift of $2 million from the Sultan of Brunei (DJN, 12/6/00).
Again, the alleged purpose was charity work in Aceh, but the public was
disquieted to learn that the fruits of this magnanimous gesture were
channelled not through the government system but through a nongovernment organisation led by the chair of PKB in Aceh and affiliated
with Nahdlatul Ulama (NU), the traditionalist Islamic body that Gus Dur
headed until November 1999, shortly after he became president (Adil,
16–22/6/00).
The Detention of the Central Bank Governor
At the same time that the Bulog farce was being played out, the president
was doing all he could to unseat the governor of the central bank, Syahril
Sabirin. With its heavy emphasis on central bank independence, the new
law on Bank Indonesia (BI) enacted in 1999 makes it impossible for the
government to dismiss the governor, except if the latter is convicted of a
criminal offence. Apparently anxious to be rid of Sabirin, the president
appears at first to have secretly offered him an ambassadorship in return
for his resignation (SP, 6/6/00), but when this offer was refused, he
applied heavy pressure by stating openly that the governor had been
corruptly involved in the Bank Bali scandal (JP, 8/6/00).
But there seems to have been another motive for wanting to remove
Sabirin from his post. The government has been in the process of replacing
the top management of the state banks, and Gus Dur’s preferred candidate
for president director of Bank Rakyat Indonesia failed to pass the ‘fit and
proper’ test applied by BI (DJN, 6/6/00). The president made his
displeasure known to the public, as a result of which the Sabirin case has
acquired a disturbing similarity to the dismissal of Laksamana.
The attorney general formally announced that Sabirin was a ‘suspect’
(rather than a ‘witness’) in the Bank Bali case, apparently hoping that
this would suffice to persuade him to step aside, but this attempt also
failed (JP, 6/6/00). Eventually the governor was taken in for questioning,
and placed in detention; Senior Deputy Governor Anwar Nasution took
over as acting governor, pending resolution of the charges against Sabirin
by the courts (DJN, 22/6/00). The spectacle of the president in open
conflict with the governor of the central bank has done little to reassure
either the public or the investment community that the stability of the
financial system can be taken for granted.
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Survey of Recent Developments
9
Policy Making Outside the Bureaucracy
The bureaucracy seems to have made little contribution to resolving the
economic crisis. This is hardly surprising in view of Lindsey’s comment
(2000: 287) that ‘… by the end of Soeharto’s rule in 1998, the bureaucracy
had largely ceased to function as any form of rational administration’,
because of ‘the almost complete subordination of the administrative
branch of government to its executive …’. The president’s lack of
confidence in his economics coordinating minister and other economics
ministers (two of whom, including Laksamana, have been removed from
the cabinet) and in the policy advice available from their largely ineffectual
departments has led to a proliferation of advisory groups. Most prominent
is the National Economics Council (DEN)—a group of about a dozen
academic economists, former ministers in various fields of economics,
and representatives of business. Less prominent, and perhaps having
less influence because of its perceived self-interested stance, is the
National Council for Business Development (DPUN), a group of about
18 prominent business people. Working in the background is the more
recently created Assistance Team, led by the foremost technocrat from
the New Order, the seemingly ageless Professor Widjojo Nitisastro,
assisted by two young and increasingly prominent economists, Dr Sri
Mulyani (who is also active as DEN Secretary) and Dr Faisal Basri, and
one big business representative, Alim Markus. Finally there is a
monitoring team led by the formerly high profile economics consultant
Rizal Ramli (now head of Bulog), which meets with the president on a
weekly basis—among other things to report on the performance of various
ministers. All of this can do little but reinforce the impression of a highly
fragmented government with no clear sense of direction in formulating
economic policy.
Social Unrest and the Military
Meanwhile the military, which, it had been hoped, might have begun to
bring peace to various troubled parts of the archipelago following the
removal of the former Co-ordinating Minister for Political Affairs and
Security, Wiranto, still proves incapable of doing so. It has been subjected
to various indignities unheard of in the Soeharto era, such as the burning
of its vehicles and abuse of its officers by students in Jakarta (JP, 29/5/
00), and public questioning of former top officers about its role in episodes
such as the killing of Muslim activists in Tanjung Priok in 1984 (DJN, 3/
5/00), the violence in East Timor before and after the vote for
independence, and the repression of the separatist movement in Aceh
(JP, 30/11/99). But although 24 soldiers (and one civilian) were convicted
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Ross H. McLeod
of murdering some 57 villagers in Aceh in July 1999—and sentenced to
up to 10 years’ imprisonment—no highly ranked officer has been charged,
much less punished, for any wrongdoing (WSJ, 18/5/00).
Two bomb blasts occurred in the city of Medan in May, including one
in a church that caused scores of injuries (DJN, 29/5/00). But the principal
focus of social unrest recently has been in Maluku, where several
thousands of individuals have been killed, injured, or driven from their
homes in communal violence pitting Christians against Muslims. Not
only have the armed forces been unable to put a stop to the carnage (DJN,
21/6/00): they have also failed to prevent the emergence of a Muslim
militia known as Laskar Jihad, which openly trained its recruits near
Jakarta before sending them off to Maluku to wage war on the Christian
community in defiance of Gus Dur’s pleas (FEER, 6/7/00). Worse still,
many believe that elements of the military are participating actively in
the violence—on both sides—including supplying arms to the
protagonists. The announcement by Gus Dur of a state of civil emergency
in Maluku (Jawa Pos, 27/6/00) has failed to bring calm to the province,
and there is a growing perception that social unrest, bombings and the
like are being orchestrated by those anxious to keep the president off
balance, and to cripple the government’s attempts to act against those
who were involved in corruption and other crimes during the Soeharto
era.
Slow Progress with Reform in the Legal Sphere
Nor has there been any improvement in the functioning of the police
force. On the contrary: especially in Jakarta there is concern about the
steady deterioration of law and order (SP, 20/6/00). People are more
and more wary of travelling around at night, and robberies in broad
daylight are commonplace. Frustration with the incapacity of the police
to protect the public has seen the emergence of an extreme form of street
justice, in which robbers who happen to be caught in the act are beaten,
doused with fuel and then set on fire by people in the vicinity (JP,
11/6/00). The Jakarta police chief bemoaned the barbarity of these acts
(DJN, 12/6/00), but if the police cannot improve their performance, more
of the same is to be expected: there is a demand for law enforcement, and
if the public sector cannot provide it, it will be ‘privatised’.
The other major concern with law enforcement is the court system.
Here, too, hopes for reformasi remain unfulfilled. As former Supreme Court
judge Adi Andojo Soetjipto (2000: 273) put it (in 1999), ‘The practice of
corruption and collusion continues in all courts to this day. … Judges
openly practice extortion from defendants and others involved in
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Survey of Recent Developments
11
disputes.’ Ironically, this is even more of a problem now than it had been
under Soeharto, for in that era Soeharto and his appointees as governors
and bupati (district chiefs) were in effect the ultimate source of authority,
and people rarely bothered to use the courts when those at the top had
made it known who was to be the winner in any given dispute. With
nobody now playing this Soeharto role, the courts are being called on to
do much more than before, especially in the commercial area. But this
has served only to increase the opportunities for extracting bribes from
parties in dispute, and to expose the atrophy of legal skills in the judicial
system during the long years when they became largely irrelevant.
Nowhere is all this more evident than in the new Commercial Courts,
from which a stream of highly questionable judgements has issued since
their establishment in 1998. And no single entity has suffered as greatly
as the Indonesian Bank Restructuring Agency (IBRA), which has lost all
but a tiny handful of the scores of cases it has brought against defaulters,
apparently because of a very understandable reluctance on the part of its
officials to compete by offering bribes (using public money) to the judges
hearing these cases. The proposal to appoint ad hoc judges to the courts
in order to overcome the lack of expertise in the financial area and to
raise standards of probity has as yet come to nothing, presumably because
of resistance from incumbent judges and corrupt bureaucrats who prefer
to keep the system as it is. Likewise, other initiatives intended to reform
the judiciary (Fane 2000: 26–7) are yet to have any discernible impact.
There are hopes that the parliament (DPR) may make a significant
contribution to the cause of law reform—and indeed, reform more
generally—by appointing capable individuals of high integrity to a
number of current vacancies on the Supreme Court, including the position
of Chief Justice. But these appointments have been awaited for some
time, and there are no doubt strong forces at work supporting a
continuation of the status quo. Without an infusion of capable, reformminded judges, it is unlikely that public trust in the courts can be rebuilt.
The Role of Parliament
Like the courts, the DPR itself is an institution that atrophied under
Soeharto. Elections were a farce, and the legislature did virtually nothing
to ensure accountability of the executive to the people. Thus, although
the DPR is now far more active than it was during the New Order, its
activism is not always well directed. It is quick to embrace populism at
the expense of good policy, for example, opposing increases in prices
under government control, and it has also hindered the recapitalisation
of failed banks by its opposition to setting market-determined interest
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Ross H. McLeod
rates on recapitalisation bonds (see below). In the case of IBRA, the DPR
has been critical of attempts to negotiate settlements with defaulters
involving debt write-offs, even though this is often the least costly option
in the attempt to recover losses from the government’s bailout of the
banking system.
It is not surprising that the DPR responds to public pressure in
opposition to increases in prices. The public are well aware that they will
be called upon for years to come to bear the enormous costs of bailing
out the banking system, whether in the form of higher taxes or reduced
provision of government services. They also vaguely comprehend that
many of the individuals who are responsible for these costs (through
their failure to repay loans from the banks) remain very well off. They
correctly infer from this that an enormous wealth transfer is now in
progress at their expense—whether to cover losses that should have been
borne by those who undertook unsound investments, or to cover wilful
default on a grand scale facilitated by a corrupt legal system. It is hardly
surprising that members of the public resist paying more for fuel,
electricity and public transport in such circumstances.
In at least one instance where the parliament could have made an
important contribution, the Texmaco case, it failed to do so. As Fane (2000:
20) noted, after extraordinarily brief consideration of the case the DPR
concluded that there was nothing untoward, and that the former regime
had acted correctly in providing a huge amount of subsidised funding
for the conglomerate. Few impartial observers were satisfied with the
argument that the company was ‘a national asset … entitled to
government assistance in time of crisis’ (JP, 1/12/99), not least because it
would have been possible to keep the company in operation without
bailing out its owners, and because the details of how the funds were
actually used remained unclear. Ironically, the attorney general’s decision
eventually to halt investigation into the case in May 2000 caused heated
debate in the DPR (JP, 27/5/00).
Parliamentary activism extends also to calling on the new president
to account for his performance in a meeting of the People’s Consultative
Assembly (MPR) in August, only 10 months after taking office. By July
this had become the focus of political prognostications. Could Gus Dur
survive the session? If so, would he make drastic changes to his cabinet?
Or might he be forced to relinquish his position? What kind of government
might replace him? How would the Muslim parties rationalise the
prospect of Vice-President Megawati Sukarnoputri as president (as
required by the Constitution if a serving president leaves office), given
that they had argued previously that a woman could not take this
position? While keeping presidents accountable for their actions is, no
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Survey of Recent Developments
13
doubt, desirable, the possibility of frequent changes in the presidency
injects even greater uncertainty into politics, and this is something
Indonesia can ill afford at a time when it is trying to convince the business
community that it is safe to resume normal activity.
MACROECONOMIC CONDITIONS
Economic Growth
The economy bottomed out in the last three quarters of 1998, at a level of
output similar to that recorded during 1995. Modest growth has occurred
since then, such that output in the March quarter of 2000 was about 5%
higher than during the depths of the recession (figure 1). With population
growing by about 8% since Q1 1995, the implied fall in real per capita
output is less than 3%. This is far less drastic than the 30% fall that some
FIGURE 1 Major Sectors’ Growth Performance
(1993 prices; March 1995 = 100)
160
140
120
100
80
60
40
20
0
Mar95
Sep95
Mar96
Sep96
Mar97
Sep97
Mar98
Sep98
GDP
Manufacturing
Construction
Trade
Source: CEIC Asia Database.
Mar99
Sep99
Mar00
Food crops
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Ross H. McLeod
TABLE 1 Output of Selected Manufacturing Subsectors
(March 1995 = 100)
1997 Q1
Q2
Q3
Q4
1998 Q1
Q2
Q3
Q4
1999 Q1
Q2
Q3
Q4
Processed Food,
Beverages
& Tobacco
Wood
Iron &
Steel
Products
Automotive
Textiles &
Footwear
130
134
179
188
163
138
171
158
159
163
166
168
108
108
104
97
95
81
71
64
64
66
68
72
105
102
107
117
96
75
68
76
71
71
75
76
117
132
104
87
73
54
48
34
36
42
49
58
112
112
105
106
100
96
85
89
89
93
95
97
Source: As for figure 1.
observers prefer to highlight, which is based on GDP measured in
irrelevant current dollar prices rather than constant rupiah prices.
Nevertheless, real output is now some 37% less than it would have been
if the pre-crisis average growth rate of 7.5% p.a. had been maintained (cf.
Pardede 1999: 9). Seen from this perspective, the crisis has been costly
indeed.
Growth performance varies widely across major sectors of the
economy. Construction fell most rapidly and by proportionately the
greatest amount—about 45% in the year to mid 1998—but it has since
been growing at nearly 12% p.a. from this low base. Wholesale and retail
trade also fell precipitously—by some 31%—in calendar 1998, and has
been growing at about 8% subsequently. Output of the oil and gas sector
and the general government sector has been fairly stable during the crisis,
as has that of food crops (seasonal fluctuation aside). It is surprising,
however, that after bouncing back in 1999, recorded food crop output in
the first quarter of 2000 was actually a little lower than in 1998 at the
height of the El Niño drought. Since climatic conditions have been
favourable, there is scepticism as to the accuracy of the Q1 2000 agriculture
figures. The sector least affected overall by the crisis is manufacturing,
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Survey of Recent Developments
15
FIGURE 2 Major Expenditure Categories
(1993 prices; March 1995 = 100)
160
140
120
100
Consumption
Investment
80
60
40
20
0
Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar97
97
97
97
98
98
98
98
99
99
99
99
00
Source: As for figure 1.
which, even after contracting considerably in the first half of 1998, never
fell below its Q1 1995 level, and has also been growing at about 8% p.a.
subsequently.
When manufacturing sector performance is disaggregated, however,
it appears that the dominant processed food, beverages and tobacco
subsector has generated the bulk of this success (table 1). Its output hardly
declined as a result of the crisis (although strong seasonal volatility
obscures the picture), and was running 62% higher in Q1 2000 than in Q1
1995—in stark contrast to all other major sectors. Output of the automotive
subsector, in particular, fell by about three-quarters from mid 1997 through
the end of 1998, and although it has grown quite rapidly since then, in
Q1 2000 it remained 40% below its level five years earlier. Other subsectors
such as wood products, iron and steel products, cement and textiles,
relying heavily on depressed sectors of the domestic market, are still
operating at low levels of output, although all have recovered somewhat
from the low points reached in 1998.
From the expenditure perspective, there is a sharp contrast between
household consumption and investment (figure 2), reflecting the much
greater degree of discretion that attaches to timing of the latter: baldly
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Ross H. McLeod
stated, people have to eat, but businesses and government can choose
not to expand productive capacity if circumstances are not congenial.
Although consumption exhibited some volatility early in the crisis—
partly related to seasonal factors—the extent of the decline from its trend
level was never more than 10%, and it has been growing slowly since Q3
1998. By contrast, investment (i.e. gross fixed capital formation) fell
steadily for almost two years from immediately after the crisis started, to
about half its initial volume. The levels recorded more recently have been
significantly higher than the lowest ebb, but the promising spurt in Q4
1999 was not maintained in Q1 2000.
The data presented above are consistent with a general impression
that the business community is ‘marking time’; very few firms seem
interested in undertaking any major new investments. Ways are being
found to adjust to low levels of domestic demand in many markets, to
cut costs by substituting cheaper inputs (including locally produced
import substitutes), to postpone the repayment of existing obligations,
and to adjust to the lack of new loans available from banks. In short,
most decision makers in the private sector would probably agree with
the economics coordinating minister, Kwik Gian Gie, who was widely
criticised for saying, reportedly, ‘If I were a foreign investor, I wouldn’t
come to Indonesia. The law enforcement is not there, but not only that,
the whole thing is so confusing’ (DJN, 11/5/00).
Forecasts of overall growth in 2000 range from a low of 1.5% in the
central statistics agency’s (BPS) ‘worst case scenario’ (box 1)2 (JP, 17/5/00)
through 3–4% at BI (DJN, 6/6/00), to the president’s 5.5% ‘if we are really
lucky’(DJN, 8/6/00), and economics commentator Sjahrir’s 6% (JP, 26/
6/00). The international financial institutions and most commentators
appear to accept 4% as realistic for the time being. The wide dispersion
of these forecasts highlights their arbitrariness, which is inevitable given
the current high level of political uncertainty.
Inflation and Monetary Conditions
Prices have increased only slightly over the last year, with the consumer
price index (CPI) just 2.1% higher in June 2000 than in June 1999.
Nevertheless monthly rates of inflation have been much higher during
the June quarter—ranging from 6 to 11% p.a.—causing some concern.
As Pardede (1999: 14–15) pointed out, the huge inflationary surge in 1998
was preceded by an explosion in the growth rate of base money, and
came to a sudden halt virtually as soon as the central bank began to bring
this money growth under control. This suggests that we should look to
monetary policy for clues as to why inflation has been accelerating
recently.
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Survey of Recent Developments
BOX 1 BPS AS ECONOMIC FORECASTER
BPS’s involvement in economic forecasting is a matter of some
concern (DJN, 21/5/00). Other countries’ national statistics
agencies stay clear of such involvement, for reasons that also apply
in the Indonesian context. First, forecasting involves conflict of
interest. Having made a forecast, the agency will inevitably feel
under some pressure to produce ex post data that demonstrate, or
at least do not call into question, its forecasting capabilities.
Second, growth rate and inflation rate forecasts are politically
sensitive numbers if they are produced by a government agency,
and thus are capable of drawing BPS—which ideally should be
above politics—into political controversies. Thus for it even to
raise the possibility (much less to predict) that year 2000 growth
might be well below the official target immediately drew criticism
from many who accused it of adding to general concerns about
the process of economic recovery and therefore possibly helping
to bring about just this unwanted outcome. Moreover, the
comment could be interpreted as a veiled criticism of the
government’s performance in managing the economy. Third, with
limited resources, the statistics agency should concentrate its
attention on producing and disseminating the best possible and
most useful permanent record of what has happened—not guesses
about what will happen, which have little or no lasting value.
In defending BPS against the criticism that greeted its worst
case forecast, outgoing BPS chief Sugito Suwito is reported to have
argued that Law 16 of 1997 on Statistics gives BPS authority to
make predictions based on empirical data, ‘but not based on
economic models’ (SP, 17/5/00). In fact, empirical data can only
describe the past, and cannot predict the future other than by using
some kind of model, no matter how simple. This point of logic
aside, if this is a correct interpretation of the Law, then perhaps it
should be changed.
17
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Ross H. McLeod
FIGURE 3 Base Money Growth (6-Month) and Exchange Rate
(June 1999 = 100)
Base money
growth
Exchange
rate
125
250
100
200
Exchange rate (Rp/$)
75
150
50
100
Base money growth (% p.a.)
25
0
Jun-98
50
0
Sep-98 Dec-98 Mar-99 Jun-99
Sep-99
Dec-99 Mar-00
Source: As for figure 1.
Figure 3 presents annualised base money growth rates for the
preceding six-month period. On this basis, it shows that the downward
momentum of the money growth rate was lost in about August 1999.
The six-month growth rate quadrupled between August 1999 and
November 1999, and more than doubled again by January 2000. By May
2000 it was approaching five times the rate of mid 1999, at 27% p.a. (The
spike in December 1999 can be ignored: it is largely the consequence of
the now all but forgotten Y2K bug, which saw Indonesian banks holding
vastly increased amounts of cash and clearing deposits at the end of 1999
for precautionary reasons.)
Base money is measured differently in the government’s Letters of
Intent (LOIs) to the IMF and in the balance sheet of the monetary
authorities, on which the above comments are based, making direct
comparison of absolute levels impossible. Nevertheless if we compare
the implied growth rates in the LOIs, a similar conclusion about loss of
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Survey of Recent Developments
19
TABLE 2 The CPI and Its Major Components
(June 1999 = 100)
Sep-99
CPI
Food
Processed food, beverages
& tobacco
Housing
Clothing
Health
Education, recreation & sports
Transport & communication
Dec-99
Mar-00
May-00
97
89
99
93
100
93
102
92
101
100
101
101
104
100
102
101
103
101
105
101
102
103
106
102
105
102
105
106
107
104
107
106
Source: As for figure 1.
control of money growth emerges. The targeted increase in base money
from August 1999 through March 2000 in the July 1999 LOI was 7.8%,
whereas the actual increase (as recorded in the May 2000 LOI) was 12.8%.
And the recorded increase for the 12 months to May 2000 was 18.7%,
which may be compared with targeted growth rates of 13.4% p.a. in the
year to March 2000 (March 1999 LOI), and just 8.6% p.a. in the period
January through December 2000 (May 2000 LOI).
It is of interest to note that the unprocessed food component of the
CPI (dominated by rice) was much lower in June 2000 than a year earlier,
following a large decline early in this period (table 2). It is important not
to jump from this observation to the conclusion that inflation would have
been higher if not for this fortuitous decline in rice prices, as this begs the
question as to whether price rises in the other categories would have
been the same if rice prices had been rising, not falling. The monetarist
view is that declines in the value of money (which is another way of
referring to increases in the price level) depend significantly on the rate
at which the supply of money grows. From this it follows that for a given
growth rate of money, declines in prices of particular goods will tend to
cause increases in prices of other goods. To put it another way, relative
price changes are not inflationary or deflationary.
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Ross H. McLeod
TABLE 3 Selected Rupiah Exchange Rates
(June 1999 = 100)
Jun–99
Sep–99
Dec–99
Mar–00
Apr–00
May–00
Jun–00
USD
EUR
AUD
JPY
100
125
106
113
118
129
130
100
129
104
105
104
117
120
100
123
105
104
104
111
117
100
142
126
133
132
145
147
Sources: CEIC Asia Database; PACIFIC Exchange Rate Service.
Thus if inflation is to be kept in check, the central bank will need to
exercise more careful control of its monetary liabilities than it has been
doing in recent months. With its independence now enshrined in law, it
can no longer blame government interference for its failure to keep
monetary policy on track.
Rupiah Exchange Rates
Figure 3 also shows that the strong recovery of the rupiah in the latter
half of 1998 has not been sustained; by the end of June 2000 the rupiah
price of dollars was 30% higher than in mid 1999. There was continued
volatility in 1999, albeit not of the same order as previously, with the
strongest point being recorded in mid 1999. After the election of Gus Dur
in October 1999 the rupiah again strengthened, but this was short lived,
and there has been a steady decline subsequently.
The rupiah is not the only currency to depreciate against the dollar in
recent times, so its decline against some currencies (such as the euro and
the Australian dollar) was relatively slight until about April 2000 (table
3). But there has been a significant decline subsequently against even
these currencies. Moreover, depreciation of the rupiah against the yen
has been even greater than that against the dollar; this is significant
because Japan is Indonesia’s most important single trading partner, and
an important source of foreign loans.
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Survey of Recent Developments
21
The impact of depreciation of the currency is multi-faceted. Tradable
goods producers will gain from increased competitiveness, especially
relative to Japan. On the other hand, those with unhedged borrowings
denominated in dollars and yen will suffer wealth losses. Having said
this, it is not clear to what extent borrowers have reduced their exchange
rate risk exposure in recent months, having learned in the most direct
possible manner of the considerable danger of not doing so in 1997–98.
There is now a widespread perception that continued weakness of
the currency can be explained by psychological factors, political
uncertainty and social disharmony. For example, the then senior deputy
governor of BI, Anwar Nasution, was reported as saying that ‘the fate of
the rupiah will depend on developments in the economy, politics and
security. If we continue to fight and burn other people’s property [the
rupiah will continue to weaken]’ (JP, 24/5/00). On the other hand,
economics coordinating minister Kwik Kian Gie could offer no
explanation for why the rupiah remained weak, given that ‘all
macroeconomic and monetary aggregates are showing positive and
encouraging development’ (DJN, 12/6/00).
Although political uncertainty is doubtless an important influence
on the value of the rupiah, it should be noted that its weakening since
October 1999 corresponds closely to the slackening of monetary control
already observed during this period (but apparently not noticed by
Minister Kwik). It is impossible to disentangle the effects of political
uncertainty and current monetary conditions on the exchange rate, but it
is important to realise that they are related. A key element of this
uncertainty is the future course of monetary policy itself: if there is an
increasingly widespread expectation of significant weakening of
monetary discipline, this will encourage a shift out of rupiah into foreign
currency, resulting in depreciation. Central banks have no direct control
over expectations about what they might do in the future, of course, but
they can certainly have some influence by virtue of their present conduct
of monetary policy. The failure of BI to keep to the base money growth
targets in the LOIs in recent months is all too reminiscent of early 1998,
when such targets were repeatedly exceeded by wide margins—with
disastrous consequences for the exchange rate. This can only strengthen
fears that monetary policy is not properly under control, and suggests
that the central bank should carry at least some of the blame for continuing
depreciation of the rupiah.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
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Ross H. McLeod
What Should the Central Bank Be Doing?
Two questions being asked repeatedly of the central bank are: what is
being done to stabilise or strengthen the rupiah? and what is going to
happen to the interest rate on BI certificates of deposit (SBIs)? BI finds
itself facing a number of policy options, none of them congenial. The
extent to which it can sell off international reserves to support the rupiah
is limited, since commitments to the IMF do not allow significant
reductions in these reserves. Besides, the government has a nominal
commitment to a floating exchange rate policy, however vaguely this is
defined (McLeod 1999: 149), which would be incompatible with
significant intervention in the foreign exchange market. On the other
hand, if it moves to strengthen the currency indirectly by increasing SBI
rates, it increases its own costs, and it increases the government’s cost of
servicing the enormous volume of bonds it has issued to recapitalise the
banking system, since the interest rate for most bonds is the same as that
on SBIs. Both factors have a substantial impact on the budget, directly or
indirectly.
The official answer to these questions was provided by the then BI
governor, Syahril Sabirin, in a parliamentary hearing on 12 June 2000. BI
‘would continue to intervene to prop up the rupiah’, including raising
interest rates on SBIs (JP, 13/6/00). A more appropriate answer would
have been to say that BI has no target for either the exchange rate or the
level of interest rates, and that these two financial prices are being left to
be determined by the markets—in the same way that the prices of shares,
or bananas, for example, are determined. At the same time, it would be
necessary to emphasise that this would not mean that the central bank
was doing nothing. On the contrary, what it is (or should be) doing is
controlling the growth of its own monetary liabilities—base money—
and all financial prices are being influenced, indirectly, through this
instrument. To put it differently, the most effective means available to
the central bank of contributing to general stabilisation is to do what the
current LOI requires it to do: stick to a clear and sensible target growth
rate for base money (currently about 7% p.a.).3 By contrast, there are no
targets in the LOI for the exchange rate or interest rates, for good reason:
in implementing monetary policy, less is more.
The central bank cannot control SBI rates independently of base
money. The issue and redemption of SBIs is practically the only means it
has of controlling base money, and it will not be able to issue appropriate
quantities if it is not prepared to allow rates to be determined by the
interaction of supply and demand.4 Indeed, the recent tendency for base
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
Survey of Recent Developments
23
money to grow far more rapidly than the current LOI calls for suggests
that reluctance to allow upward adjustment of these rates has once again
been compromising the LOI base money growth targets.
Alternative Monetary Policies
Frustration with the steady decline of the rupiah appears to have led to a
‘brief exchange of views’ on the possibility of introducing capital controls
at a meeting between the president and his economic ministers and
advisers at the end of May (DJN, 1/6/00). But there was little support for
the idea, and it was officially laid to rest a few days later at a meeting
between the president and the new managing director of the IMF, Horst
Koehler (JP, 6/6/00). Another radical alternative for stabilising monetary
conditions—a currency board, which had been close to adoption shortly
before Soeharto was forced from office in May 1998—has reappeared in
recent times, with the publication of an article advocating such a course
in the international press (AWSJ, 15/5/00). The suggestion was quickly
followed by a strongly voiced counter attack in a letter to that newspaper
by former BI governor Soedradjad Djiwandono (AWSJ, 26/5/00). By
contrast, Schuler’s (1999) suggestion of dollarisation for Indonesia seems
to have fallen on deaf ears, at least for the time being.
At the time the currency board proposal was endorsed by Soeharto,
the extraordinarily vociferous domestic and international opposition to
it was not to the currency board concept per se, but was driven, rather, by
the conviction that the proposal was a subterfuge by Soeharto to enable
him to prolong the looting of the central bank that was already under
way. In the event, of course, that looting continued regardless, and it is
sobering to contemplate that the ultimate damage might have been less
if the proposal had not been blocked. The Soeharto factor hardly seems
relevant any longer, however, with the former president apparently
seriously weakened by two strokes, being subjected to repeated (albeit
apparently fruitless) questioning in relation to corruption allegations by
the attorney general’s office, and having been placed first under city
detention and then, in late May, under house arrest (Kompas, 30/5/00).
The re-emergence of lax monetary policy implementation and
renewed weakening of the currency suggests that it might be worthwhile
now to re-examine the currency board proposal. On the earlier occasion
it was almost universally believed that the currency board exchange rate
was to be fixed at Rp 5,000–5,500/$. On this basis, the currency board
may well have failed. But Stephen Hanke, who brought the idea to
Soeharto, asserts that his intention was always for the rate to be
determined by the market, not by the government (Broening 1998; Hanke
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:05 19
24
Ross H. McLeod
1998: 32–3). His proposal was to announce the intention to establish a
currency board, and then to allow the rupiah to float freely without any
form of intervention in the market by the central bank for a period of
perhaps a month; the chosen rate would be that which emerged from
this market driven process by the end of the free-float period. Individuals
close to the policy making action at the time seem in little doubt that
Soeharto’s intention was to fix the rate within the range just mentioned,
regardless of Hanke’s position, but if the currency board proposal is to
be rethought now, this important detail concerning the process for setting
the rate will need to be taken into account.
BANK RECAPITALISATION AND
THE SAGA OF BANK CENTRAL ASIA
In thinking about the collapse of the banking system and the damage
this has done to the economy (box 2), it is worth noting that although
this is widespread in terms of the number of banks that have failed, to a
large extent the losses are concentrated amongst the state banks and a
small number of private banks—including Bank Central Asia (BCA), now
majority owned by IBRA on behalf of the government. The bank was
taken over in May 1998 after Soeharto’s resignation triggered a run on its
deposits, but not before Bank Indonesia had provided a staggering
amount of liquidity support—some Rp 32 trillion (Republika, 19/9/98),
equivalent to about $4 billion at an exchange rate of Rp 8,000/$.
Since BCA was owned by various members of Soeharto’s family and
by long-time crony Liem Sioe Liong, it immediately came under physical
attack by opponents of the regime when Soeharto was forced by public
pressure to step down in May 1998. It was soon taken over by the
government, and eventually became part of IBRA’s portfolio, pending
de-nationalisation.
In its July 1999 LOI, the government had announced its intention to
sell BCA during the last quarter of 1999. There was no suggestion then
that this would be anything less than 100% divestment, but when the
offer of shares to the general public finally took place in late May 2000,
only 22.5% of IBRA’s shares were offered for sale. Presumably this
reflected the government’s reluctance to allow too many of IBRA’s assets
to be sold off in ‘fire sale’ conditions (Business Times, 28/6/99), although
whether it will be able to realise significantly greater amounts by
postponing divestment is moot. Even with this small volume of shares
the amount raised from the sale was somewhat less than had been hoped
for, with the offer price of Rp 1,400 per share being near the bottom end
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Survey of Recent Developments
OF THE
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BOX 2 ALTERNATIVE MEASURES
COST OF BAILING OUT THE BANKING SYSTEM
Fane (forthcoming) suggests that the probable (stock) cost of the
government’s commitment to bail out depositors and other
creditors of the banking system (