Survey of recent developments

Monthly inflation fell to around zero in October 1998, while the rupiah strengthened considerably. Some recovery of share prices and significant declines in interest rates have given cause for optimism, and early estimates of increases in both poverty and unemployment now appear unjustifiably pessimistic. Although non-oil exports have been growing reasonably well, the plunge in imports reflects the severely depressed economy, and there is little to suggest that recovery is imminent. The private sector is waiting until the political outlook becomes clearer, and continuing outbreaks of violence have further eroded its confidence. The new bankruptcy laws are not working effectively and so a de facto debt moratorium prevails. Consequently, banks are unwilling to provide the new finance needed it firms are to re-employ workers and boost output. Neither the foreign debt restructuring agency, INDRA, nor the Jakarta Initiative has contributed significantly to resolving the debt bottleneck. The bank rehabilitation program appears mired in confusion, and there is opposition to it from both bank owners and the parliament. Privatisation is moving far more slowly than planned and, although the budget for 1999/2000 has been reasonably well received, it appears to be contractionary. The emergence of populist economic policies can be seen in the MPR Decree on Economic Democracy, the proliferation of cheap credit programs, proposals for transferring the assets of failed banks to cooperatives and small and medium enterprises, and the introduction of an anti-monopoly law.