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Thursday, October 28, 1999 Published at 15:07 GMT 16:07 UK

Business: The Economy

Rebuilding Indonesia's economy

President Wahid discusses the crisis with economics guru, Kwik Kian Gie

Sorting out the economic problems in Indonesia is a huge challenge for Abdurrahman Wahid's new government. The BBC's economics correspondent, Andrew Walker, looks at the task ahead.

It was the Asian economic crisis of 1997 that set off the train of events leading to the recent change of government in Jakarta, and the very nasty recession that followed.

Indonesia Flashpoints
The economy shrank by an extraordinary 16% last year. Inflation was 66%, having been a modest 5.2% two years earlier.

Unemployment shot up. Poverty increased sharply and many middle-class people had their savings wiped out.

But now the International Monetary Fund thinks the economic decline has stopped. It has even forecast that recovery - a return to economic growth - will start about now.

For the new government, one of the immediate priorities is to persuade the IMF to restart its lending programme, which has been suspended because of a scandal surrounding Bank Bali.

[ image: A Muslim woman buys US dollars at a money exchange in Jakarta]
A Muslim woman buys US dollars at a money exchange in Jakarta
The bank paid a commission of $80m to a company associated with senior figures in the former President BJ Habibie's Golkar party for recovering unpaid loans.

The affair has been investigated by accountants Pricewaterhouse Coopers, and the IMF will not send a team to Jakarta to assess whether the next instalment of the loan should be paid until the report of the investigation has been published.

The new government is keen to publish, but the decision is now for the Indonesian parliament to take. If it does publish, the chances are that an IMF team will head for Jakarta soon.

If their report back to the IMF's board turned out to be favourable, the loans would restart.

The IMF has already indicated some areas where it thinks more rapid progress is needed. The banks are one, quite apart from the corruption allegations.

Inherent weakness

One reason why the crisis throughout East Asia was so severe was the weakness of the banks. They had lent heavily in local currency, having borrowed in dollars and yen.

They didn't have enough capital to be able to withstand the losses that followed the collapse of the Indonesian currency, the rupiah.

Many banks are being merged, or getting new injections of public funds to restore their financial health. Some were nationalised by a special agency created to sort the banks out.

The IMF wants this process to proceed more quickly, and the nationalised banks to be returned to private ownership.

It also said in its most recent review of Indonesia that there was a need for increases in public spending on what it called "social safety nets" - programmes to help the poor.

New start

Overall, the IMF's assessment is that the economic recovery programme remains on track. Since that review - in August - the political situation has moved on.

There's a new government and independence for East Timor is going ahead. If that proves to be the start of a new period of political stability, it can only help the economy.

The man charged with turning around the economy is Kwik Kian Gie, an ethnic Chinese and long-time advisor to Vice President Megawati Sukarnoputri.

Even if he pulls it off, a recovery will not reverse at a stroke all the social damage done to Indonesian society by the economic crisis. World Bank officials say that will take many years.

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