Indonesia

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Money

1910-1941: The guilder of the Dutch East Indies is pegged one to one to the Dutch guilder, and the islands play an important role in Holland's balance of payments. As elsewhere in Asia, investment to expand and upgrade plantation production increases the public debt imposed on Asian economies by the colonial governments.

1942-1944: The occupation currency suffers from high inflation, opening the door to an active black market. Wartime inflation also serves to reduce both public and private debts.

1945-1949: During the war for independence, Dutch-controlled areas and Indonesian republican areas each issue currency: Oeang Netherlands Indies Civil Administration and Oeang Republik, respectively.

1950-1958: Indonesia inherits a debt of 4.3 billion guilders to Holland. The state takes over the 120-year-old Java Bank and establishes it as the Central Bank. Two other state banks are created to finance industry and importers as part of the strategy of using state capitalism rather than the private sector to end foreign domination of the economy.

1959-1965: Sukarno prints money as needed, despite falling exports and access to hard currency. Hyperinflation results, with figures passing 600 percent.

1966-1973: The "Berkeley Mafia" of economists controls inflation through tight fiscal and monetary policy. Rescheduled debts and new loans revive the flow of imports. Besides the Central Bank, specialized state banks channel funds into plantations, export/import, rural credit, industry, savings, and mining. Development banks funnel investment in each province to industries prioritized in the Five-Year Plan.

1974-1977: Inflation rises to 40 percent after a sudden surge of oil wealth following 1974 OPEC price hikes. It is brought down to below 10 percent by 1978, but the combination of inflation and a fixed exchange rate hurts exports in the meantime, as exported goods become more expensive to foreign buyers.

1978-1986: To make exports more competitive, the government devalues the rupiah 50 percent in 1978, and again in 1983 and 1986. Reforms in 1983 make monetary policy more market-oriented.

1987-1991: To avoid large devaluations the government adopts a "managed float" policy, allowing annual falls in the currency of under 5 percent. Stability encourages investment, but also spurs firms to borrow in foreign currencies. Loosening banking regulations leads to a surge in the money supply and inflation, forcing a tighter monetary policy.

1992-1996: Government debt slowly rises from 1992 to 1997, but the economy seems strong, and there is little domestic debt. In the same period, though, private debt increases from $28.2 billion to $78.1 billion, making the economy vulnerable to a fall in the exchange rate. Further banking deregulation leads in 1995 to about 200 private banks accounting for 48 percent of credit.

1997-1998: After the Thai crash, speculators and investors pull out of the region, and the rupiah falls from Rp2,500/US$ in July '97 to Rp17,000 in '98. More than 65 percent of loans are unrecoverable; many banks declare bankruptcy. Public debt soars due to bailouts and IMF loans, until payments equal 27 percent of the budget. Deregulation opens up banking, securities, and insurance to foreign investment.

1999-2003: In 1999, the Central Bank, Bank Indonesia, is granted full autonomy. Its main objective is to maintain the stability of the rupiah and keep inflation under control. A rupiah recovery in 2001-02 is halted by the October 2002 Bali bombing, which also pushes the stock market down to four-year lows. The event underscores the fragility and political vulnerability of the economy.

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Categories: Overview | Political | Economic | Social | Environmental | Rule of Law | Trade Policy | Money
Graphs: Growth | Income | Inflation | Well-being | Trade Volume | Trade (CAB) | Debt | Spending

Related: Video | LinksView all categories for years from to | See Full Report | Print