IMF performs U-turn over Indonesian currency board

THE INTERNATIONAL Monetary Fund (IMF) has effected a sharp policy U-turn over Indonesia, softening its conditions for providing aid and lifting objections to the formation of a currency board that would peg the Indonesian rupiah to the US dollar. The policy change emerged from remarks by Stanley Fischer, the IMF's deputy managing director, just hours after President Suharto had been elected for a seventh five-year term amid continuing unrest in Indonesia.

"There is reason for flexibility," Mr Fischer told a news conference in Washington, stressing that the IMF was "mindful of the potential tragic consequences of events taking place in Indonesia" and the "major humanitarian problems that could be arising there". He said that a currency board could work, perhaps in six months' time "if the right conditions are met".

Mr Fischer's remarks appeared to pave the way for the IMF to reverse its decision to delay the next tranche of aid for Indonesia. It had announced only last week that a $3bn (pounds 1.81bn) payment initially scheduled for mid- March would be delayed at least until April.

The shift in policy could not have been made without the endorsement of the US Treasury, which is the main contributor to the IMF and has led calls for thorough economic reforms in Indonesia as a condition for international aid. The content and tone of Mr Fischer's remarks contrasted with the fierce warnings against stubbornness and backsliding that have emanated from Washington in recent weeks.

Mr Fischer's remarks also defused a very embarrassing disagreement between a body of opinion that included the US administration and the IMF, and one of Washington's main South-east Asian allies and a senior US academic economist who is retained by President Suharto as economic adviser. The economist, Steve Hanke from Johns Hopkins University, strongly supported the formation of a currency board as a means of stabilising the Indonesian currency and energetically argued his view in the US media.

The IMF had objected to the proposal from the time it was first proposed by President Suharto a month ago, saying that Indonesia was not yet ready for a rigid currency regime.

The rupiah rose on international currency markets yesterday following the more conciliatory tone from the IMF. A high-level Indonesian economic delegation is expected in Washington shortly to discuss international assistance with IMF and US officials.