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.

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