Suharto Gives A Little And Gets A Lot

An expected IMF deal leaves him plenty of maneuvering room

It's a confrontation that has pitted the might of the U.S. Treasury and the International Monetary Fund against an ailing dictator and his clique. Now, this battle between the IMF and Indonesian President Suharto may be ending, thanks to compromise by both sides. But on balance, the old man comes out the winner. By threatening to cause another panic in Asia with his reckless policies, Suharto has forced the IMF to water down its terms considerably. Now, he will get billions in aid, while still keeping his family's grip on the economy.

Informed sources in Jakarta and Washington say that by early April, Suharto and the IMF hope to announce new terms that Indonesia will honor to qualify for the next $3 billion tranche of aid from the global agency. "The Indonesians are negotiating in earnest with the IMF," says David Lipton, under secretary for international affairs at the Treasury Dept. The Indonesians will have to boost interest rates sharply to curtail growth in the money supply; consolidate the banking sector to 20 institutions, from 200 now; break up certain monopolies held by Suharto's family; and work out a repayment plan for the $74 billion Indonesian companies owe foreign banks. The Indonesians are already acting. On Mar. 25, banks doubled the rate on one-month deposits to 67.5%.

The IMF is also backing off from earlier demands. While Suharto's son Hutomo Mandala Putra will relinquish his grip on the clove trade and auto industry, the President's family and friends still will control the markets for essentials like kerosene, flour, rice, and cooking oil. The IMF wanted to break up these monopolies immediately, as well as end subsidies that are keeping down prices. But they'll stay in place for now, with a stipulation that the Indonesian government gradually phase them out. The IMF decided it could not trigger social unrest by insisting on the end of subsidies at a dangerous moment. And the monopolies seem like the only way to distribute food efficiently to hungry Indonesians.

SHOPPING AROUND. Suharto did his best to avoid making any concessions. In a last-ditch bid to get funding with no strings attached, the Indonesians pleaded with the Japanese to offer their own aid. "But the Japanese said, `Sorry, we've got to go with the IMF,"' says a prominent Indonesian businessman who attended some of the talks. Sources say the Australians gave a similar rebuff. Cornered, Suharto's negotiators started hammering out a deal with the IMF.

One contentious issue, Indonesia's proposed currency board, seems to have disappeared. But Suharto may have extracted a nice concession for dropping this idea. Indonesian sources say that if Suharto sticks with the reforms, come June, the U.S., Germany, and Japan may buy enough rupiah to stabilize the currency at 7,000 to the dollar. Washington sources emphatically deny this.

A possible side deal on the currency is not the only benefit for Suharto. By backing off on the subsidy issue, the IMF implicitly has dropped its demand that Indonesia reduce its deficit to 3%. Preserving state subsidies on staples also will maintain the safety net that keeps Suharto in power. And the subsidies ensure a steady cash flow for politically connected businesses like Salim Group, which has a monopoly on milling imported flour. Salim Chief Executive Anthony Salim also will run a new agency to implement the IMF deal. "Salim is effectively Prime Minister now," says one prominent businessman, who hopes Salim can separate his business interests from his political role.


Suharto can still delay reforms. He is supposed to set up an Indonesia Bank Restructuring Agency to sell off weak banks. Yet nobody knows how long that would take or whether the Indonesians will give the agency real power. And a gradual phaseout of certain monopolies and subsidies gives the Indonesians many a chance to slow down the process.

If Suharto manages to evade real reform, his clan's triumph will be Indonesia's failure. An American businessman notes that last July, when the rupiah began a 90% slide against the dollar, the consensus was that the Indonesian economy would recover in 18 months. Now, he says, it will take three to five years. A deal is in the works. But real recovery is a distant prospect.

Before it's here, it's on the Bloomberg Terminal.