Release Date: July 10, 2001
Jubilee Plus
New Economics Foundation, U.K.
Press Contact: Ann Pettifor

Indonesia Pays Price of IMF Blunder

by Ann Pettifor

President Wahid of Indonesia is a blind Muslim cleric, a Liverpool fan and, before losing his sight, was a football commentator; he's also mad about Janis Joplin.

He presides over a huge nation but lives like an impoverished bachelor. The contrast with Berlusconi and other G8 leaders, who meet in Genoa later this month for their annual summit, could not be greater. So too the contrasts between the challenges facing the leader of the world's fourth largest nation - population: 210m - and the president of the US - population: 284m.

In the US, 34m people are defined as poor; in Indonesia 100m people live just above or below, the poverty line. Since 1997, 39m Indonesians have lost their jobs. Just over 6m Americans are unemployed.

President Bush, despite substantial foreign liabilities and a huge trade deficit, is not beholden to any outside agency, thanks to the strength of the US economy. His administration is riddled with corruption and cronyism, deemed acceptable because that's how things are done in the Republican party.

President Wahid's government has the first democratic mandate in 40 years. He has to manage an administration riddled with endemic cronyism and corruption and still dominated by Suharto, his family, friends and militia. He has inherited substantial foreign debts from his predecessor, whose regime was lent at least $100bn by the west as reward for his murderous anti-communism during the Cold War.

Wahid is beholden to a foreign agency, the IMF, because of the 1997 economic crisis - not of Indonesia's making. And his budget for reconstruction is drained by domestic debts, now widely agreed the direct result of an IMF blunder on November 1, 1997 - the instruction to close 16 banks.

Before 1997, Indonesia had no significant domestic debts. Today, domestic and external debt-service expenditures make up 41% of expenditures and 61% of tax revenues.

To pay the domestic debt bill, the IMF is recommending a "quick fix": the mobilisation of revenues through the removal of subsidies on kerosene and other fuels - the poor financing the cost of the IMF blunder. The fuel price increases led to rioting in Jakarta, and will destabilise Wahid's administration and his successor's, should Megawati Sukarnoputri replace him in August.

Also, the IMF is insisting on the independence of the Bank of Indonesia, and that the government replenish BI's capital base. The government has agreed to independence but, before replenishing the bank, wants to sack staff found guilty of gross mismanagement in 1997. However, the IMF is protecting the officials.

The injustice of Indonesia's predicament is this: those co-responsible for the creation of her unpayable debts - G7 creditors, the IMF and World Bank - do not bear the financial risks associated with the loans they made to Suharto. Instead the risk is transferred almost entirely onto the poor. Not only are they delinked from their financial responsibilities, perversely, they gain from major policy errors and go on to compound them.

In the absence of an international bankruptcy law, those who lent to Suharto are rewarded. NGOs in Indonesia are calling for an independent arbitrator to mediate between Indonesia and her international creditors and to arrive at a fair and sustainable debt strategy.

The precedent for such an initiative can be found in Indonesia in 1970 when western creditors, after a process of mediation led by the independent central banker, Herman Josef Abs, gave a fillip to Suharto's regime by recommending the write-off of 50% of Indonesia's debt; and reduced her debt payments to just 6% of export earnings. Today, Wahid's government spends 50% of export earnings repaying debts incurred under Suharto's regime.

The big winners from all this will be the G7. Because of Indonesia's indebtedness G7 governments are now able to bully a trading partner once perceived as a competitive threat. Major shareholders of the IMF will be gleeful at the fund's insistence that Indonesia reduce tariffs on imported sugar to 25%. Japan's tariffs on sugar remain at 80%.

These are policies that will bring down Mr. Wahid and his democracy. They will accelerate the country's economic and environmental degradation. The G7, living it up at Mr Berlusconi's expense, will wash their hands of it and blame ... cronyism and corruption.

["With Indonesian President Abdurrahman Wahid dismissed and replaced by Vice President Megawati Sukarnoputri, there is mounting concern that the world's fourth most populous nation may be sliding towards civil war and, ultimately, disintegration."--Alex Standish, "Showdown in Jakarta as Wahid is Ousted," Jane's Security Digest, July 23, 2001]

[Ann Pettifor is co-ordinator of Jubilee Plus at the New Economics Foundation.]

Copyright © 2001 Ann Pettifor - All Rights Reserved

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