Not currency speculators but Indonesian and especially foreign investors with a chronic craving for US dollars destroyed the national economy.
Indonesia has always experienced a current account deficit in its balance of payments. This means more money always leaves the country than enters it. Between 1979 and 1996 the shortfalls totalled US$ 43.4 billion. The two biggest reasons for the deficit are repatriating foreign investment profits, and paying interest on foreign debts. In other words, foreign interests are draining the surplus out of Indonesia.
The current account measures money moving in and out of the country. It incorporates all exports, imports, payments on foreign loans, foreign investors sending back their profits, and so on. Year in year out, it is in deficit. So it doesn't contribute at all to national savings or to our foreign currency reserves.
The following tables show the state of the current account in 1995/96 and 1996/97, just before the monetary crisis.Sources and uses of foreign capital funds:
|Sources of funds||1995/96 (US$billion)||1996/97 (US$billion)|
|Direct foreign investment||5.4||6.5|
|Other private capital||4.5||6.2|
|Government foreign debt (mid- to long term)||5.7||5.4|
|Uses of funds||1995/96 (US$billion)||1996/97 (US$billion)|
|Financing current account deficit||7.0||8.1|
|Repaying foreign debt||5.9||6.1|
|Adding to foreign currency reserves||2.7||3.9|
When we look at the figures, several conclusions spring easily to mind.
First. Our foreign currency reserves are highly dependent on getting new foreign loans, because the deficit stops us from accumulating foreign reserves freely. This means our reserves are effectively borrowed, not free as we should expect in a healthy economy.
Second. Just as in a business, all payments (income versus expenditure) must be balanced. This means that adding to our foreign reserves by means of debt in this way in fact represents money leaving the country. We call this capital flight, which is a bad thing. In other words, the capital flight committed by private parties in Indonesia (better called economic criminals) is paid for by government foreign debt.
This is surely a case of extraordinary stupidity, not to mention complete inhumanity. Private wealth overseas grows at the expense of government debt, ultimately paid for by the ordinary people of Indonesia, who have no means of enjoying its benefits.
Now back to our question. What caused the collapse of the rupiah against the US dollar? It was caused by a gross imbalance between the value of total exports including oil and gas, and the value of total imports. Not only are imports larger, they have also been growing at a faster rate than exports. This is what causes the current account deficit.
Exporting supplies us with foreign currency, while importing demands it back again. Since both are normally done in US dollars, the excess of demand over supply makes the value of the US dollar grow against the value of the Indonesian rupiah.
Moreover, export and import practices in Indonesia are full of manipulative practices, in which exports are underinvoiced and imports are overinvoiced. The government has always overlooked such practices, because of the constant conspiracies between politics and business (remember the way Coordinating Minister Sudomo backed corrupt businessman Eddy Tansil?).
So who caused this excessive demand for foreign currency? They fall into three categories: * Importers (both foreign and national), foreign investors and foreign creditors. They want foreign currency to pay for their imports, to send their profits back overseas, and to pay the interest on (private and government) foreign debt. * Those who repay principal on their foreign debt. * Those committing capital flight - both businesses and individuals.
Ironically, all these people causing excessive demand for foreign currencies share the same perception of uncertainty, namely that the Republic of Indonesia may become financially insolvent due to its chronic current account deficit. Indeed the perception is strengthened by the reality that the government has always paid back old debts with new loans, whose value is less than that of the old. As a result, the Republic constantly transfers more money out of the country than enters it. Indonesia suffers from what is known as Fisher's Paradox, which says that the more foreign debt you repay, the bigger the debt you accumulate.
Add to that the political uncertainty. All these sources of uncertainty come from within the country, not from overseas. I can't see that there has been a conspiracy by foreign currency speculators such as George Soros, who simply have a good nose for opportunity. We should rather blame ourselves for mismanagement and immorality.
But there is a conspiracy, and a much more dangerous one than George Soros. That is the one concocted by foreign interests through the IMF and the World Bank who are, by the latest count, prepared to give us loans of up to US$49 billion. Most of this debt will be used to pay for the current account deficit. That is, most of it will be used to allow foreigners to import goods and services, repatriate their profits, and repay their foreign loans.
In other words, the debt will be enjoyed by people overseas, but the burden of it will be born by the people of Indonesia. The debt will be used once again to pay for our dependency on imports from overseas. It's truly absurd for us to say 'thank you very much' to the IMF, the World Bank, and other members of this plot.
The political conspiracy means that, first, overseas interests will now determine our economic and social policy and even our power structure. Second, control over our foreign currency reserves by foreigners will be even greater than before. Third, control over Indonesian economic resources by foreigners will become even more intensive.
This truly is national policy-making at its least heroic. We will be under the heel of foreigners as if we were a colony.
Allow me herewith to declare: heroism has died among the Indonesian power elite and the intellectuals who support them. We will now witness the collapse of the Indonesian nation state. The people will not forgive the power elite for this. Do not be surprised if in the near future a history book is published with the title: Indonesia, the fall of a nation.
Dr Sritua Arief is an Indonesian economist. He obtained his doctorate at Hull University in 1979, and presently teaches in the Management School of the University of Northern Malaysia.