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Tuesday, 19 May, 1998, 16:11 GMT 17:11 UK
The IMF in Indonesia: saviour or troublemaker?
Man walking along street in Jakarta after the riots
Picking up the pieces after the riots
One of the events which led to the current upheavals in Indonesia was a rise in fuel prices as part of the economic reforms agreed with the International Monetary Fund (IMF). The IMF expects Indonesia to undertake a wide-ranging series of changes in its policies intended to restore confidence in the economy and help it resume growth. The BBC's Economics Analyst Andrew Walker looks at what the IMF thinks is the remedy for the country's economic malaise.

Andrew Walker
Andrew Walker
The main principles behind the programme agreed with the IMF are a stable financial climate and allowing the market to decide what is produced and how it is sold.

It is the market principle that lies behind the recent reductions in subsidies on fuel and food and the consequent rise in their prices. The IMF believes that resources will be used more efficiently if they are not subsidised and if the price paid by consumers reflects the real cost of producing these commodities.

That market idea is the basis of many other elements in the programme, notably abolishing monopolies on items such as cloves - used in Indonesian cigarettes and palm oil, the main cooking oil.

In addition, the IMF wants the government to cut some areas of spending to ensure that the crisis does not lead to too sharp a deterioration in its finances. At the same time, it says it did not want the budget to be tightened so much that it made the economic crisis even worse.

The risks of reform

There were always risks in allowing food and fuel prices to rise, as they account for a large part of the spending of the poor.

The IMF did make an effort to limit the impact on them. The price of rice, the staple food, did not rise, although the cost of other foods did. With fuel - the largest increase - 60% was in petrol or gasoline, which mainly effects relatively affluent Indonesians.

The rise in the price of kerosene, used as a cooking fuel by the poor, was much smaller at 25%.

Even so, there was always a risk that the price rises would provoke a hostile response. But if they were the immediate spark, the economic crisis and a political system intolerant of opposition have created a combustible material that could easily be ignited.

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