Financial Times Tuesday February 17, 1998

All Power to the IMF

The International Monetary Fund's threat to withdraw its support for the $43bn Indonesian rescue package entails substantial economic and political risks. Yet it is important to recognise that the brinkmanship lies primarily on the side of Indonesia's President Suharto.

In proposing to introduce a currency board without the Fund's consent he has, in effect, made a nonsense of the IMF programme agreed in January. Not only has this destroyed any credibility that the programme might have had; it has put the IMF in a position where its ability to treat with all but the smallest and weakest countries would be placed in question if it failed to follow up its threat.

This is, then, a confrontation in which Mr Suharto ultimately stands to lose more than the Fund. But that may not be how it appears to an ageing leader in Jakarta, as he struggles to preserve his own position and the wealth of his cronies in business and banking. Backing down would inevitably weaken the authority of his regime.

The bizarre feature of the row is that the future resolution of the Asian financial crisis may now turn on the technical issue of whether the rupiah should be pegged to the dollar. That is admittedly an alarmist view of the potential fall-out. Indonesia is an extreme case, both in terms of politics and the extent of its solvency problems.

The composition of the country's trade is very different from that of the other victims in the Asian drama. These facts alone ought to rule out further financial contagion in the region. Yet the events of recent months are scarcely conducive to calm and rational market behaviour.

There are no satisfactory outcomes. One of the less dangerous would be for Mr Suharto to recognise that it is in his own interest to go ahead with the programme he agreed with the IMF in order to create more stable conditions in which a currency board might make sense.

Yet the president is, at best, a wasting asset to his country. After the heavy pounding of recent weeks, the currency markets may feel that the only credible programme is one signed by a successor regime. It would not be surprising if that were also the private judgment of the IMF and its managing director Michel Camdessus.

Any transition will carry grave risks. The last time, when Mr Suharto seized power in 1965, it involved bloody civil strife, including the slaughter of many ethnic Chinese. Widespread defaults would be likely. How Beijing might respond in such circumstances is a difficult question.

If the nastier scenarios come about, it will be no fault of the IMF. Mr Camdessus has no option but to stick to his guns. He deserves all support in taking a far from comfortable stand.

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