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IMF and the Asian crisis:(INDONESIA)

Are the critics right?

7004IBA

Trade Investment and Economic Policy in Asia

Dr. Moazzem Hossain

Presented by :

Aditya Kakatkar - S2705942

Aman Tung - S2696449

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Overview Country overview. Indonesian economy. Asian crises overview. Causes of Asian crises. Crises in Indonesia. Response of Indonesian government. Development after the crises. Australia’s trade with Indonesia. IMF Purpose and role of IMF. IMF’s response to Asian crises. Role of IMF in Indonesia. IMF’s financial support package. Critic’s view towards IMF. Conclusion. References.

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Country Overview

Country- Republic of Indonesia .

Population- 237 ml.

GDP ( PPP )

2008 estimate: Total $960.776 billion

Per capita - $3,980

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Indonesian Economy

GDP (PPP).-$915.9 billion (2008 est.), $863.1

billion (2007), $811.1 billion (2006).

GDP- real growth rate. – 6.1% (2008 est.),

6.4%(2007), 5.5%(2006 est.)

GDP- per capita - $3,900 (2008), $3,700(2007),

$3,500 (2006).

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Continued.

GDP – composition by sector –

Agriculture : 13.5%.

Industry : 45.6%.

Service : 40.8% (2008).

Exports : $136.8 billion on fob (2008).

Imports : $128.8 billion on fob (2008).

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Asian crises overview

Asian crises started with the devaluation of Thailand’s Baht from 2 July 1997.

Indonesia, South Korea and Thiland were the countries most affected by the crises.

Hong Kong, Malaysia, Laos and the Philippines were also hurt by the siump.

The People’s Republic of China, India, Taiwan, Singapore, Brunei and Vietnam were less affected.

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Asian crises involves 4 basic problems :

Inadequately developed financial sectors.

Role and replenishments of funds of the IMF.

Effects of the crises on USA and the world

Shortage of foreign exchange.

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Causes of Asian crises

Private-sector debt problems and poor loan quality Rising external liabilities for borrowing countries. The close alignment between the local currency and

the US dollar Weakening economic performance and balance of

payment difficulties. Currency speculation. Technological changes in financial markets and Lack of confidence in the ability of the governments

in question to resolve their problems successfully.

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Crises In Indonesia

Impact of financial crises in Indonesia- The most

effected area’s were

Food

Fuel

Financial crises

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Response of Indonesian Government

In view of lessening the impact of high price in the international

market the government action includes.

1. Reduce import tariffs.

2. Reduce value added taxes.

3. Undertake market operation for stabilizing food prices

4. Subsidize soybean price for small scale processors.

5. Subsidize fuel price to small scale food processor through

conversion of kerosene to LPG.

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Development after the crises

GDP recorded a 0.2% increase in 1999

Growth in the agriculture sector

Manufacturing sector expanded by 2.2%.

Consumer inflation price came down to 20.5% in

1999.

Market capitalization climbed to $58 billion at end

of 1999.

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Australia’s trade with Indonesia

Australia’s Exports: Indonesia was

the Australia’s 10th most important

export market in 2002, accounting

for 2.6% of total exports. Exports to

Indonesia declined by 5 % in 2002.

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Continued

Australia’s Imports: Indonesia was

Australia’s 9th most important source of

imports in 2002, accounting for 3.3%of total

imports. Imports from Indonesia rose by

8.1% in 2002, after a hefty 44% increase in

2001.

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International Monetary Funds (IMF)

IMF, was conceived at the Bretton Woods UN conference in July 1944.

Headquartered in Washington, DC.

Focus on monetary policies and activities .

Provides technical assistance to governments.

IMF works to alleviate poverty. The IMF is funded by a quota system of contributions from its members.

The United States has by far the largest IMF quota.

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The purpose and role of IMF

Facilitate the expansion and balanced growth of international

trade.

promote and maintain the high levels of employment and real income .

  Promote exchange stability to avoid competitive exchange

depreciation.

  Elimination of foreign exchange restrictions which hamper the growth of

world trade.

  Give confidence to members by making the general resources of

the Fund temporarily available to them under adequate safeguards.

To promote the health of the world economy.  

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IMF’s Response to the Asian crisis

IMF approved US$35 billion for reform programs in

Indonesia, Korea and Thailand.

Indonesia was augmented by an additional US$1.3

billion from the IMF and US$5 billion from multilateral

and bilateral sources.

Structural reforms to remove the hindrances in growth

and to improve the efficiency of financial

intermediation .

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Role of IMF in Indonesia

On Nov 5, 1997 IMF’s Executive Board approved a three year stand-by Arrangement with Indonesia equivalent to $10 billion.

IMF allowed Indonesia to put a limit of only US$5 million per customer on forward foreign currency trading between banks and non-residents.

International Monetary Fund has arranged support packages for Thailand, Indonesia, and South Korea, with $17.2 billion, $40 billion, $57 billion respectively.

IMF implement financial restructuring program, closed 16 small banks in Nov 1997, compromising only around 2.5% of the total assets of banking sector.

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Continued

IMF committed for tight monetary policy and a comprehensive package of

structural reforms prepared in cooperation with the world bank.

On Jan 15 - IMF and Indonesia sign an agreement strengthening economic reforms.

On Oct 31- Impressive program of macroeconomic adjustment and structural

reform were formed by IMF. Which includes:

Strong monetary and fiscal policies designed to bring adjustment in the

economy and to restore confidence to financial markets.

It consists a major restructuring of financial sector to ensure the future

soundness.

It involves significant deregulation measures and trade reforms.

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IMF financial support Package

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Critic’s view towards IMF

High interest rates entailed by the IMF programmes would had effects on the private sector’s viability.

Financial liberalisation by affected countries without prudential regulations was a serious mistake. IMF should have discourages such liberalisation till appropriate regulatory regime was in place.

Improper safety net development due to rapid trade liberalization.

Use of monetary policy for inflation stabilisation conflicts directly with the use of monetary policy for exchange rate stabilisation.

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Conclusion

IMF plays important role in fiscal, monetary and

exchange rate policies.

Exchange stability and reform programs to facilitate

the countries.

Areas most effected by Asian crises were fuel, food

and financial crisis.

Establishment of effective banking system.

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References

Dr. Carunia Mulya Firdausy, 2000. THE SOCIAL IMPACT OF ECONOMIC CRISIS ON EMPLOYMENT IN INDONESIA. Centre for economic and Development Studies-Indonesian Institute of Sciences.

Lepi T Tarmidi, 1999. Krisis Moneter Indonesia: Sebab, Dampak, Peran IMF dan Saran. “Krisis Moneter Tahun 1997/1998 dan Peran IMF”, Jakarta, 10 Juni 1998. FEUI Report Universtiy of Indonesia.

IMF Evaluation Report, 2003. The IMF and Recent Capital Account Crises Indonesia, Korea, Brazil. International Monetary Report.

Yoga Affandi, 2004, Estimating Monetary Policy Rule in Post Crisis Indonesia. Bank of Indonesia Evaluation Report.

Dick K. Nanto , 1998. THE 1997-98 ASIAN FINANCIAL CRISIS. CRS Report for Congress.

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Arnt, H and Hill, H Southeast Asia's economic crisis, origins,

lessons, and the way forward Institute of South Asian Studies.

Rosser, A The politics of economic liberalisation in Indonesia,

state, market and power. Richmond, Surrey.

Hill, A The Indonesian economy in crisis, Institute of South Asian

Studies, Singapore.

Dick, H; Houben, J; Lindblad, T and Wie, T 2002, The emergence

of a national economy, ASSA Southeast Asia publication series.

Oxford Economic Country Briefing, Indonesia, 2009.