Chapter 10 - Role of the IMF in Indonesia's Financial Crisis

Summary

Introduction

The issues and challenges facing President Megawati's government, with respect to its dealings with the International Monetary Fund (IMF), originated from the previous governments. An evaluation of the relationship between the Indonesian Government and the IMF should begin with the latter's early efforts to address the Indonesian crisis through its programmes under the stand-by arrangement.

Prior to the 1997 financial crisis, the IMF's engagement with Indonesia was occasioned by the balance of payments' problems experienced by the country in the late 1960s and early 1970s. After that, for more than two decades, Indonesia had enjoyed a very good working relationship with the IMF without a need for any stand-by loans.

Faced with the financial shocks that struck Indonesia in July 1997, the government of Indonesia initially reacted by widening the intervention band for the rupiah and then replacing the band with a flexible exchange rate management system. This was supported by other prudent fiscal and monetary policies. Unfortunately, this did not restore market confidence in the Indonesian economy. In the end the Soeharto government decided to seek the IMF's help, requesting the use of its facility. In October 1997 the Indonesian Government signed the first Letter of Intent (LoI), which was approved by the IMF board of executive directors a month later. This arrangement triggered an active involvement of the IMF in the adjustment programmes that the Indonesian Government had to adopt to address the financial crisis.

This chapter describes the nature of the IMF's involvement in Indonesia's efforts to resolve the financial crisis confronting the nation, its relationship with the Indonesian Government, as well as the likely prospects for the near future. It also gives an assessment of why certain steps were taken while others were not. It is hoped that this will shed some light on the lessons to be learned by both the Indonesian Government and the IMF in resolving the crisis and paving the way towards recovery.