By Paul Blustein
Washington Post Staff Writer
Thursday, January 15, 1998; Page A01

JAKARTA, Indonesia, Jan. 15 (Thursday)—Indonesia's embattled President Suharto, seeking in one grand stroke to restore confidence in his nation's battered economy, agreed today to a package of reforms including curbs on official favoritism for companies controlled by his wealthy children.

The package, announced by Michel Camdessus, managing director of the International Monetary Fund, is designed to accomplish for Indonesia what a $43 billion bailout launched in November couldn't -- stem a massive flight of capital from the world's fourth-most-populous country that has marked one of the gravest turns in Asia's financial crisis.

The plan has been eagerly anticipated this week in financial markets as a potentially crucial turning point in the crisis, and the mere fact that it was imminent helped fuel a powerful rally in Asian currencies and stock prices Wednesday. Indonesia's currency, the rupiah, which was in free fall last week, soared 10 percent against the U.S. dollar, and Jakarta's benchmark stock index rose 6 percent.

Suharto went on national television this morning to explain the program, but his speech evidently failed to inspire local investors, as the nation's key stock index fell 2.21 percent.

In trading elsewhere in Asia this morning, stock prices were higher for a third straight day in Singapore, Malaysia, South Korea and Thailand, but Hong Kong's Hang Seng index fell 6.69 percent. Japan's market was closed for a holiday.

Only a few days ago, panic-stricken Indonesians were stripping grocery shelves of goods, regional stock and currency markets fell to new lows, and the financial chaos here was threatening to drag down markets and economies in neighboring countries.

Clinton administration officials were clearly heartened by the developments, though they refrained from claiming total success for the emergency initiative they launched late last week with the IMF to help restore calm to the region. That initiative was motivated by fears that the crisis seemed to be worsening to the point where it would set back growth prospects for years to come in one of the world's best markets for U.S. exports.

Washington was also worried that the turmoil would spread to markets in North America and Europe and might trigger social unrest or even military conflict that could embroil U.S. troops.

"I think that there is an increasing recognition of the importance of strong policies as the best approach to working through these difficulties, and I think that is something that is encouraging," said Lawrence H. Summers, the deputy secretary of the treasury, who was in Bangkok on Wednesday on the fourth stop of a whirlwind mission to Asian capitals.

But he added: "How markets will move in the short run is not something that we're ever engaged in predicting."

In a news conference following a formal signing by Suharto of a letter outlining his promise to undertake reforms, Camdessus said that he was "confident that, if this program is implemented with the determination and commitment that I myself have seen over the past two days, Indonesia should be able to soon begin to overcome its economic crisis."

Unlike a similar "rescue of the rescue" that was announced at Christmas for South Korea, the IMF is not providing Indonesia with fresh injections of dollars to induce greater cooperation in restructuring its economy, officials said, noting that Indonesia's central bank is not as strapped for cash as was Seoul's.

Rather, the most important elements of the package consist of new commitments by Suharto to reduce the cronyism and nepotism that have eroded Indonesia's economic foundations, and moves to "strengthen and accelerate" steps he accepted in the first bailout but later balked at implementing.

For example, a "national car" project in which Suharto's son Tommy has been deeply involved is to lose all of its government support, as is a project headed by a close Suharto ally to build a passenger plane that economists here have long derided as a wasteful extravagance.

A list of monopolies and cartels slated for elimination is to be expanded to include key items such as sugar, and the schedule for elimination has been moved up for other monopolies and cartels, including the clove monopoly, also controlled by Tommy Suharto. Cloves are a major commodity in Indonesia because they are used in spice-flavored cigarettes that are enormously popular. Special concessions to trade and distribute such goods have provided a lucrative source of income for a number of powerful tycoons close to the president.

About a dozen large infrastructure projects, including two power plants in which Suharto's daughters hold major interests, will be canceled, Camdessus announced. Previously, Suharto had said only that he would "postpone" or "review" them.

Officials involved in negotiations with the Indonesians voiced optimism that the package would go a long way toward convincing financial markets that Suharto takes seriously the need to change course so that the relentless pessimism afflicting the nation's stock and currency markets will ease. The plunge in the nation's currency, the rupiah, has threatened to bankrupt nearly all of the country's major firms because of their increased burden of paying interest and principal on foreign debts borrowed in dollars.

Asserting that the early November rescue effort had gone off track in part because of backsliding by the government on reforms and what he called "the feeling that vested interests could sabotage it," Camdessus said that Suharto shared his view that "we have to make sure that this time, this will not occur."

No one is claiming the crisis is over. In Indonesia, worries persist that the markets will weaken anew unless the 76-year-old Suharto assures the nation that he is preparing the way to select a strong successor. Rumors that he is sick, or about to be toppled in a military coup, have roiled markets in recent weeks.

The new IMF program for Indonesia came as controversy flared anew over whether the fund has made the Asia crisis worse by insisting that financially strapped countries embrace economic austerity. An internal IMF report surfaced that, according to critics, constitutes an admission that the fund may have contributed to Indonesia's crisis by forcing the abrupt closure of 16 ailing banks, causing depositors to pull their money out of sound banks and thereby making it impossible for many otherwise healthy companies to obtain capital.

The report does not suggest that the IMF should be blamed for making a misjudgment or for failing to reverse the Indonesian crisis. It puts the primary responsibility on the Suharto regime for what it called the "disappointing performance" of the economy since the Nov. 5 IMF rescue.

Nevertheless, the report provides ammunition for the IMF's foes, particularly members of Congress who question whether Washington should be supporting international bailouts led by the monetary fund. And it underscores that when the IMF rushes in to save troubled economies, its prescriptions can involve more art than science.

[In Washington yesterday, House Minority Whip David E. Bonior (D-Mich.) signaled that the House Democrats may seek to impose pro-labor and pro-environment conditions on IMF funding, much as they did during the administration's failed effort to pass fast-track trade legislation late last year.]

But remarkably, the new Indonesian package won restrained praise from an economist who is one of the most influential and outspoken critics of the IMF's $100 billion-plus bailouts for South Korea, Indonesia and Thailand.

Jeffrey Sachs of the Harvard Institute for International Development, who had advised Indonesia on coping with its crisis, said in a phone call from Hong Kong late last night that the measures targeting Suharto family members' businesses makes for good "symbolism" to impress markets with the dedication to reform. But, he added, such moves don't necessarily get at the root causes of the region-wide crisis.

Sachs' colleague at the institute, Steven Radelet, was more positive about the package. "I think it will make a good, positive splash," he said. "The events of the last week have really galvanized attention at the top" of the Indonesian government.

Under Indonesia's new IMF program, officials said, the government will be allowed to run a budget deficit equal to 1 percent of gross domestic product, as opposed to the surplus of 1 percent of GDP required in the earlier program.

But the IMF is continuing to insist that interest rates be permitted to rise freely, in the hopes that higher yields will draw investor interest in buying rupiahs.

Staff writer Guy Gugliotta in Washington contributed to this report.