Survey of recent developments

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21 Citations (Scopus)

Abstract

Market confidence has declined further because of increasing political uncertainty and inconsistent implementation of policy. Mistrust between key institutions such as the IMF and Indonesian policy makers has deepened with the emergence of problems of governance and transparency, controversial suggestions for new bond issues, delays in the divestment of assets controlled by IBRA (the bank restructuring agency), and disagreements over proposed amendments to the central bank law. International support for Indonesia has waned, and there is a clear tendency on the part of the IMF to involve itself more and more in the micro management of economic policies. Economic growth has slowed, and a near-term rebound seems unlikely. The rupiah depreciated by around 18% in the first half of 2001; inflation is now of the order of 11%; and interest rates are again on the rise. Monetary policy will need to be tightened, which will result in further increases in interest rates in the short term. There is much opposition to such an outcome, but the longer adjustment is postponed the more difficult it will be later. Deteriorating economic conditions have made it necessary to revise the current budget building in assumptions of slower growth, higher inflation, a weaker exchange rate and higher interest rates. A number of fiscal reforms, including tax increases and the implementation of energy price rises originally planned for April, result in the revised budget deficit being little different from that originally planned, however. Whether the new figure is realistic depends crucially on progress with privatisation and with asset sales by the bank restructuring agency. The bank restructuring program has resulted in state dominance of the banking sector. Bank lending is still at a low level, partly because banks are constrained by the requirement to increase their capital adequacy, and partly because they have been inadequately recapitalised. New measures will need to be taken soon to increase their private sector, but even new injections of government equity might be a cheaper option than closing more banks and paying off their depositors. Additional mergers of banks are not likely to be helpful.

Original languageEnglish
Pages (from-to)141-171
Number of pages31
JournalBulletin of Indonesian Economic Studies
Volume37
Issue number2
DOIs
Publication statusPublished - 1 Jan 2001

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