By Paul Blustein and Keith B. Richburg
Washington Post Staff Writers
Tuesday, February 17, 1998; Page D01

In an ominous sign for the international rescue of Asia's ailing economies, Indonesia's President Suharto told President Clinton in a weekend phone call that the International Monetary Fund is failing to stem his country's financial crisis -- and that the rescue's failure explains why he is planning a drastic change in Indonesia's monetary system.

The account of the phone conversation, which took place Friday night Washington time, was provided by Steve H. Hanke, a Johns Hopkins University economist who is in Jakarta advising Suharto, and confirmed by a senior Clinton administration official.

After Clinton reiterated objections that had been raised by the IMF to Suharto's plans for a new monetary regime, Suharto retorted that "the current IMF program hasn't been a roaring success," according to Hanke. He said Suharto demanded that Washington propose an alternative, "because what you've got here now isn't working."

Suharto's statements to Clinton underscore the desperation of the situation in Indonesia, which looms as a potential disaster for the IMF-led effort to stabilize the Asian economies. Despite a $43 billion international bailout, Indonesia's crisis has failed to abate and the nation's currency, the rupiah, has remained severely depressed.

The rupiah fell another 14 percent yesterday against the U.S. dollar, closing at 9,800 rupiah per dollar. At that level, few Indonesian companies can afford to import the raw materials they need to continue operating, and most are technically bankrupt because they cannot afford to pay back the dollars they borrowed in previous years. In early trading today, the Indonesian currency was at 9,650 rupiah per dollar, a gain of 1.6 percent from yesterday's close.

Indonesia's troubles pose a grave threat to the already weakened economies of neighboring countries, and reflecting fears that the Asian contagion is about to flare anew, financial markets tumbled elsewhere in the region. The Thai baht dropped 4 percent, the Singapore dollar dipped 1.5 percent, the Malaysian ringgit fell 2 percent and Hong Kong's main stock index shed 151 points, or 1.47 percent, to finish at 10,124.03. The Hong Kong index was up 1.28 percent in late morning trading today, while the Thai baht, Singapore dollar and Malaysian ringgit also were up slightly.

Investors were rattled by fresh reports of riots in Indonesia's provinces. They also were dismayed at the news that the research and technology cabinet minister, B.J. Habibie, who is associated with several controversial and costly large-scale projects, has emerged as the clear front-runner to become Indonesia's vice president next month and Suharto's heir apparent.

Most unnerving of all to the markets, however, was the intensifying dispute between Suharto and his would-be rescuers in Washington that is threatening to cause Indonesia's rescue package to come unhinged.

The Indonesian president, having evidently concluded that his country is gaining little from the conventional market-oriented reforms prescribed by the IMF, is pushing ahead with a proposal to establish a "currency board" that would rigidly fix the exchange rate for the rupiah at about 5,000 per dollar. The state minister for national development planning, Ginandjar Kartasasmita, told reporters yesterday that the government is proceeding with plans for the board, which would require the Indonesian monetary authorities to surrender control over interest rates, allowing them to soar if necessary to maintain the fixed rate for the rupiah.

His comments marked the first official reaction since a report in The Washington Post on Saturday disclosed that the IMF had privately threatened to cut off bailout funds to Indonesia if Suharto proceeded with the currency board approach. The IMF argues that for now at least, Indonesia's economy is too weak -- and Suharto's credibility too damaged -- for Jakarta to make a convincing case to the markets that it can maintain a disciplined fixed-rate policy for the rupiah.

Analysts are now speculating whether the IMF warning, delivered in a letter to Suharto from IMF Managing Director Michel Camdessus, is serious or if some sort of face-saving compromise is likely. Some said it is unlikely that the IMF and the United States would allow the economy of the world's fourth most populous country to collapse completely, and they speculated that Suharto might be prepared to call the IMF's bluff, gambling that Indonesia is too important for Camdessus to carry out his threat.

"Any reasonable person would conclude that the cost of the IMF pulling out its $43 billion from Indonesia would be far greater than any damage done by a currency board," said Eugene Galbraith, the Hong Kong-based research director for ABN Amro Asia Ltd. and a longtime watcher of Indonesia. "It was a mistake to send such an uncompromising letter. Somebody has got to give."

In Brussels, European Union finance ministers gave full backing yesterday to the IMF's tough stance. "We all strongly agreed with [Camdessus] that it would be premature for Indonesia to adopt a currency board now," British Finance Minister Gordon Brown told a news conference.

In a phone interview from Jakarta, Hanke, a fervent advocate of currency boards, said he had held a "constructive" meeting with IMF representatives yesterday to discuss their concerns about the idea.

He said Suharto had told him that Indonesia should honor all commitments it had made to the IMF, but that this didn't mean that Suharto would back away from a currency board -- only that the Indonesian leader wanted to make sure the plan wouldn't violate pledges to the IMF. "We're moving ahead full speed," Hanke said, adding that he expects the IMF to give him a detailed and technical explanation of its objections.

Bijan Aghevli, a senior IMF official who played a key role in designing the Indonesian bailout package, emphasized in an interview yesterday that the fund has favored the use of currency boards in some previous cases. But he likened the step to "major surgery" that could have disastrous side effects on a weak patient, and he argued that a far less risky course for Suharto is to show markets that he is serious about implementing IMF-mandated reforms.

Responding to Suharto's apparent loss of faith in the IMF, Aghevli asserted that the blame for Indonesia's troubles lies not with the fund but with "lack of confidence in the markets that the program is going to be put in place." He cited evidence that Suharto was hoping to continue subsidizing industrial projects in which his children and cronies hold major interests such as the "national car" backed by his son Tommy.

"Then you also have uncertainties relating to the political situation," Aghevli said.

That was an oblique reference to Habibie's continuing emergence as the clear favorite to succeed Suharto. In recent days, Habibie has received the endorsement of Indonesia's three officially sanctioned political parties to become the country's next vice president. Although Habibie's fans view him as a visionary for initiatives such as his project to build an Indonesian aerospace industry, his critics -- including the IMF, World Bank and many mainstream economists -- regard him as a dangerous spendthrift who would squander scarce resources on projects that Indonesia, still relatively poor, can ill afford.

"I think Minister Habibie is a shoo-in now," said Galbraith. Others, however, cautioned that the final decision will come from Suharto, who is notorious for last-minute surprises.

Meanwhile, investor jitters were reinforced by continuing reports of sporadic violence in several towns, including Pagar Alam, about 300 miles northwest of Jakarta, and Pengalengan, 110 miles to the east of the capital, where mobs protesting rising food prices ransacked and burned shops owned by members of Indonesia's ethnic Chinese minority.

Television footage reaching Jakarta from areas devastated over the weekend showed a scenes of destruction. One car, owned by an Indonesian-Chinese family, had the words "Chinese dogs" spray-painted on the side. Some Moslem shopkeepers were painting the words "Islam" or "Moslem-owned" on the sides or shutters of their stores to ward off looters.

Blustein reported from Washington; Richburg reported from Jakarta.