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In Washington, leaders of the International Monetary Fund voted to give Indonesia another billion dollars in emergency aid. Kwame Holman has the background report and Elizabeth Farnsworth leads a panel in a discussion about the economic situation in Indonesia.

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KWAME HOLMAN: In Washington today leaders of the International Monetary Fund voted to give Indonesia another billion dollars in emergency aid. It was the third installment of the $43 billion IMF bailout package announced last October. It was then that Indonesia's President Suharto, after watching his country slide into its worst economic crisis in three decades, agreed to implement economic reforms as a condition of the IMF bailout.

Indonesia's leaders agreed to cut budgets, close insolvent banks, and end cozy relationships between the government and businesses, including companies owned by Suharto family members. But President Suharto initially resisted implementing the reforms, prompting the IMF to suspend payment last December and twice revise its agreement with the government, once in January and again last month. The latest pact allows Suharto to continue to use government funds to keep food prices low but forces him to close more banks and take steps to strengthen the currency, the rupiah, in order to attract investors. Today Suharto announced further economic reforms.

The Indonesian government will end a series of subsidies that will mean sharp rises in fuel prices, public transportation fares, and electricity rates. Two huge monopolies that produce palm oil and clothes used to make cigarettes will be dismantled. Even as they face economic hardship, many Indonesians also are demanding political reform from the Suharto government. For the past two months thousands of students have conducted almost daily protests around the country, calling for economic and political changes, including a more democratic multiparty system. President Suharto, in power for 32 years and recently re-elected to a new five-year term, has said political reforms will wait until his term ends in 2003. But this weekend, government officials said Suharto now has opened the door for reform.

JIM LEHRER: Elizabeth Farnsworth in San Francisco has more.

ELIZABETH FARNSWORTH: And we turn to two Indonesia watchers now. Stephen Parker is chief economist for the San Francisco-based Asian Foundation, which supports open economies and political systems in Asia, and Donald Emmerson is professor of Southeast Asian Studies and Political Science at the University of Wisconsin, Madison. He is co-author of the forthcoming book "Indonesia Beyond Suharto." Thank you both for being with us. And Stephen Parker, how important is the $1 billion that was freed up today?

STEPHEN PARKER, The Asia Foundation: Well, it's very important. After months of basically negative news out of Indonesia, this is one of the first signs of positive movement. And the importance is more than just the billion dollars. It gives--it frees up the Asian Development Bank and the World Bank giving additional funds. And most importantly, it says that IMF believes that the government is serious about implementing the reforms and the packages that were agreed to last April. So it raises credibility to try to attract more private investment back into Indonesia.

ELIZABETH FARNSWORTH: What will the $1 billion likely be used for? What's the most important need right now?

STEPHEN PARKER: Well, Indonesia is a large enough place $1 billion doesn't really make a whole lot of difference. It will probably go in the foreign exchange reserves, and it will be aimed at trying to stabilize the rupiah. Again, what's really important is the signal that it sends both to the other international financial institutes but most importantly to the private sector that Indonesia is not going to go inward, but it's going to continue to be involved in international markets and to do the kinds of very comprehensive reforms that it agreed to in the recent April 9th memorandum with the IMF.

ELIZABETH FARNSWORTH: Okay. Don Emmerson, I want to come back to those reforms, but first, how bad is the economic situation right now? Mr. Emmerson, can you hear me?

DONALD EMMERSON, University of Wisconsin: I can.

ELIZABETH FARNSWORTH: Good.

DONALD EMMERSON: Can you hear me?

ELIZABETH FARNSWORTH: Yes. How bad is the economic situation right now, before we get into the reforms, themselves, that the government's undertaking?

DONALD EMMERSON: It's extremely bad. We have to remember that over a 12-month period since May of last year the value of the Indonesian rupiah, the currency, has plunged, as has the value of the stock exchange by perhaps 70 to 75 percent. We have to keep in mind that the interest rates at the moment in Indonesia are the highest in Asia. People are predicting negative five, negative ten. I've even seen negative 15 percent growth this year. Inflation could be 50 percent by the end of this year. Indonesia's economic situation is terrible.

ELIZABETH FARNSWORTH: Okay. Now, Mr. Emmerson, what has the government promised to do? Give us a little more detail on what the government's promised to do that made possible the freeing up of the $1 billion today.

DONALD EMMERSON: Well, that's a good question. I think Steve might be able to give you more details. Perhaps the IMF just decided to go along, that is, I think they began--the first agreement in October of last year was supposed to work. It didn't. The second agreement in January of this year was also supposed to work; it didn't. The government fluctuated. It reneged. President Suharto wasted weeks toying with the idea of a currency board, some sort of magic bullet, you know, that could make things better, and in the end, it seems to me that perhaps the IMF decided Indonesia with 202 million people in a strategic position in Southeast Asia is just too important to let go down the tubes.

ELIZABETH FARNSWORTH: Is it the way you see it, or do you think there actually have been--you said there have been some significant reforms.

STEPHEN PARKER: Right. Right. Well, there has been the last couple of weeks. Most important, the Central Bank has begun to cut back--tighten back on monetary policy. That a was very important element of the agreement that hasn't gotten a lot of publicity but previous to that--

ELIZABETH FARNSWORTH: What do you mean by that?

STEPHEN PARKER: Well, previously, the Central Bank had been pumping large amounts of money to keep the banking system basically solvent, and that was leading to inflation, which was tending to cause the rupiah to be all the more week. The cutting back of the monetary policy is one of the primary parts of the memorandum of April 9th. And that, again, gives credibility. It will raise interest rates. It will cause difficulties for the economy, but it comes back and brings back integrity to monetary policy to lower inflation rates, which is the first step towards strengthening the rupiah. They've also done work on restructuring the banking system, and they've cut back on a couple of controversial programs. The closed monopoly was pulled back. And as noted earlier, they began to reduce the subsidies for gasoline and for other kind of commodities that will raise prices. They've tried to reduce--they've tried to keep the prices lower for the products that are consumed most by the poor but that still have important effects.

ELIZABETH FARNSWORTH: And Mr. Emmerson, what about political stability, how important, how significant are the student demonstrations?

DONALD EMMERSON: Well, I think they are of growing significance. Never in the history of the new order, since it began in the mid 1960's, have we had student demonstrations on such a massive scale all over the archipelago. And it's not clear whether the momentum that we've seen in recent weeks will continue, will peak, or will fade--whether the end of the school year will mean that the students disperse to their homes and forget about politics or on the contrary ratchet up the pressure on Suharto. What has been particularly striking to me is the way these demonstrations have most recently focused in on the identify of the president, himself. I mean, students are brave enough now to stand up on campuses and say Suharto simply must go. Now, it's one thing for a student to say that; it's another--quite another thing for Suharto to go. I'm not predicting that Suharto is going to respond to these requests, but I am suggesting that the political temperature is rising rapidly.

ELIZABETH FARNSWORTH: And how is the government responding so far?

DONALD EMMERSON: Well, it's interesting. This is a repressive regime. This is an authoritarian regime. You might think that they would arrest all the demonstrators and leave it that. But I think they know that the risk is too high, that if they crack down suddenly across the board, they could create an even more massive backlash, especially from the middle class and other non-students who could clog the streets of Jakarta and then, indeed, the end of the regime might be at hand. And so they're walking a very careful tightrope. They're trying to coop the students. They're trying to divide them, and, yes, they are engaged in repression. Pius Lucdi Ilanan is one of the people who "was disappeared" and tortured while under detention and only recently released and escaped from Indonesia. But, by and large, the regime has handled the demonstrations with great caution. They don't want the students to leave the campuses because they know that once the students hit the streets, then there could be major violence. And all it would take is for a dozen, two dozen students to be shot down in a confrontation with Indonesian troops and then all bets could be off.

ELIZABETH FARNSWORTH: Mr. Parker, there is a direct tie here between the economic situation and the government handling with some restraint these demonstrations, right? I mean, the Clinton administration has warned not to use terribly repressive measures and the IMF has made some warnings like that, right?

STEPHEN PARKER: Absolutely. The international exposure now, the international intention--attention to Indonesia is much greater than ever before. And it's important for them to build both credibility in their economic management but also credibility in their political governments. And it would be the kiss of death to have, as Don mentioned, to have these riots escalate into violence. That would completely reduce the confidence of the international financial market and the ability for the Indonesian government to continue to govern stably.

ELIZABETH FARNSWORTH: And, Mr. Parker, what's likely to be the result of the price rises that will be the result of some of the announcements today about the end of subsidies and electricity, for example, is that likely to drive people who need cheap transportation, need cheap electricity into the demonstrations?

STEPHEN PARKER: Well, that's a good question. I mean, it's not going to be--it's going to be difficult for a lot of people, but at the same time, many people in Indonesia realize that some of these tough decisions have to be made. The most important part is that it's balanced. If the increases were made in these kind--these basic prices that affect the broad amounts of consumers, if it's also balanced by cutting back in the preferences and the kinds of things that have been sort of egregious in terms of helping people get rich very quickly, and if it's balanced in that kind of way, I think people will think it's fair and realize that in a nation in a difficult situation they have to work hard to get out. If it's not balanced, then it'll raise cynicism and could cause more problems.

ELIZABETH FARNSWORTH: Do you agree with that, Mr. Emmerson? Does it seem balanced so far in that for example one of the Suharto family monopolies was apparently--they announced it would be broken up today?

DONALD EMMERSON: Well, you know, the critical question here is: Will the regime follow through on its commitments? This has been the question, it seems to me, since the October agreement, and so all of the optimism has to begin with the word "if." If the regime implements the commitments, if it dismantles the monopolies and so forth, then the IMF will end up being satisfied and perhaps restoration of confidence in the economy will occur. But, frankly, at this point we've gone way beyond whether Tommy, one of the sons of the president, happens to have a monopoly on cloves or not. We're talking about the inability to obtain letters of credit. We're talking about inflation that is going to hit badly at the budgets of large numbers of Indonesians. We're adding to that El Nino, the drought, which still is creating problems in the country. You talk about the forest fires and Kalimantan. It's been an extraordinary, dense series of disasters. Now, I'm not predicting that the regime is going to fall. It seems to me between one alternative--which is no change at all--and the other alternative--extreme alternative, which is transformation, the truth probably lies somewhere in-between. But it's a very delicate time.

ELIZABETH FARNSWORTH: We have just a few seconds left. What do you think about that? Do you agree with that analysis?

STEPHEN PARKER: I think so. President Suharto has political stability right now. The question is how he can transform both his government's mandate to meet the demands for political reform and also maintain credibility in their economic management.

ELIZABETH FARNSWORTH: Well, thank you both very much for being with us.

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