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Blunder by IMF deepened Asian economic crisis

By Tom Rhodes in Washington and a correspondent in Jakarta,
in the London Times
15 January 1998

Food queues and riots undermine Suharto

THE International Monetary Fund has admitted that an important part of its Asian rescue strategy failed, causing a panic among banks that proved a catalyst for market falls in East Asia.

A confidential IMF report emerged as America announced it was working with allies to convene a meeting of industrialised nations within two months to combat the financial crisis in Asia.

The report concluded that Indonesia's economic decline was aggravated by misjudgment at the IMF's Washington headquarters. Officials assumed the closure of certain banks last November, particularly those run by relatives of President Suharto, would inspire confidence. But it helped to bring Jakarta's banking system to the brink of collapse, sent investors fleeing from relatively safe institutions and quickened the decline of the currency, the rupiah.

Disclosures in the report came to light as Michel Camdessus, the IMF's managing director, arrived in Jakarta yesterday, saying that he expected to sign "a very solid agreement" with President Suharto. "The immediate priority is to arrest and turn around the tremendous loss of confidence and stabilise the market through monetary discipline and the dramatic acceleration of long overdue stuctural reforms," he said. Earlier in the day, the 76-year-old Indonesian leader met William Cohen, the US Defence Secretary, who said Mr Suharto was "determined to deal with the issues constructively and to move very quickly on various reforms".

A new deal is necessary because Mr Suharto did not implement measures agreed last October with the IMF for a $43 billion (£26 billion) rescue package. For the most part, the IMF report blamed the lack of reforms by Mr Suharto for the crisis.

But publication of the report could not have come at a worse time for the IMF, which faces growing criticism in the region over its planned remedies for the turmoil.

Recommendations on tight budgets, bank closures and high interest rates have been blamed for worsening the pain when it was claimed that businesses needed loans to combat mass unemployment and bankruptcy. The IMF report acknowledged that its demand to close 16 insolvent banks was counter-productive, concluding: "These closures, far from improving public confidence ... set off a renewed 'flight to safety' ".

Indonesians had withdrawn $2 billion from the banking system and shifted further funds from private banks they had assumed would be next in line for closure. By the end of November, two thirds of all Indonesia's banks had experienced a run on deposits.

The US House of Representatives banking committee announced yesterday that Robert Rubin, the Treasury Secretary, Larry Summers, his deputy, and Alan Greenspan, chairman of the Federal Reserve, would be called to testify about the crisis at the end of the month.