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  • Indonesia Report

    Indonesia Closes Insolvent Banks, Plans Austerity Steps

    By Geoff Spencer
    Associated Press
    Sunday, November 2, 1997; Page A28

    JAKARTA, Indonesia, Nov. 1—The government of Indonesia shut down 16 insolvent banks and planned other austerity measures today, a day after receiving word of $33 billion in foreign loans to revive an economy hit hard by financial declines across Asia.

    Finance Minister Mari'e Muhammad called for calm and stressed the government would reimburse depositors. "These banks are insolvent to the point of endangering business continuity, disturbing the overall banking system and harming the interests of society," he told reporters. He said the nation's 224 other banks would open as usual on Monday.

    The move came after the International Monetary Fund announced its second-largest rescue package ever, totaling $23 billion. Singapore and Japan said they will add another $5 billion each.

    The government said it will announce further economic changes on Monday. In exchange for the loans, Indonesia has apparently agreed to cut government spending and lower trade barriers, which could spell the demise of some inefficient state monopolies.

    Until a few months ago, Indonesia was among Asia's fastest growing economies. But steep falls in currency and stock values across the region weakened the economy, a situation aggravated by wild swings in financial markets around the globe last week. Indonesia, the world's fourth most populous nation, has recently been rocked by a series of riots and protests over its economic ills.

    Political analysts said the authorities were concerned over possible social unrest as the reforms start to take effect. At the same time, a brush fire disaster continues to sweep large areas of the archipelago, which is experiencing one of its worst droughts in years.

    Rising prices and unemployment, especially in urban areas on Java, home to 60 percent of the nation's 200 million people, could prove a potent brew.

    In his statement, Mari'e appealed "to all members of society to remain calm" during reform of the banking system. He said the government would refund deposits of as much as $5,700 and refund larger deposits as best it could by using liquidated bank assets.

    Some of the closed banks have close links to the government of President Suharto, 76, a retired five-star army general who has governed for 32 years. They include Bank Jakarta, owned by Suharto's half-brother.

    Analysts said the decision to impose banking reforms was long overdue and was a sign that the government might be serious about more far-reaching reform.

    Indonesia last month became the third Asian nation this year to seek IMF assistance because of currency turmoil. In July, the IMF approved a $1 billion loan for the Philippines and in August put together a $17.5 billion package for Thailand.

    Analysts were upbeat at the quick start Indonesia has made in tackling its problems. The government had planned banking reforms before it approached the IMF in early October to help stabilize its currency, the rupiah, and restore market confidence.

    "To me, the structural reforms are more important than the size of the package," said Pablo Zuanic, head of research for W.I. Carr Indonesia.

    © Copyright 1997 The Associated Press

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