Indonesia's decision to go to the International Monetary Fund was endorsed by the country's President yesterday after a monthly economic cabinet meeting concluded outside help was essential to restore confidence in the nation's currency. The rupiah has lost over 33 per cent of its value against the US dollar since July and over half its value in the last year.
Indonesia's finance minister Mar'ie Muhammad said: "While Indonesia's foreign exchange reserves remain at a safe level ... nevertheless in order to safeguard the situation, the government is sounding out long-term support funds from international institutions including the IMF."
Indonesia's appeal for a rescue package was supported by Michel Camdessus, the IMF's managing director, who said: "The IMF strongly supports the approach that has been followed by Indonesia which sees this as an occasion to strengthen its economic policies even if fundamentals are basically sound."
Teams from the IMF, World Bank and Asian Development Bank will arrive in Jakarta at the weekend to open discussions on assistance. The IMF is hoping to accelerate the rescue programme by using the procedures of its Emergency Financing Mechanism.
Dennis de Tray, the chief representative of the World Bank, said of the Indonesia situation: "This is not a financial crisis. It is a crisis of confidence. It is possible that Indonesia will not have to draw on the [rescue] package at all if confidence is restored to the economy."
Analysts said IMF support would boost confidence in Indonesia and may make it easier to reduce interest rates without damaging the currency further.
But they said the size of the programme was likely to be far less than the $17.2bn (pounds 10.5bn) organised for Thailand. They said that because of its much healthier foreign reserves, Indonesia may receive only between $4bn and $6bn.
The rupiah has been in freefall since July, raising fears of widespread corporate defaults on a mountain of substantially unhedged private debt. The World Bank said a priority was to assess the scale of the Indonesia's short-term debt. The government is set to compile a list of all private loans outstanding.
Government leaders have warned of possible social unrest, remarks which political analysts said were triggered by the financial crisis and a drought.