“Development Experiences in Developing Countries”

-A Case Study on Indonesia

Presentation :

Presented By:MD. ARMAN HOSSAIN A.B. (30006)NABED PARVEZ (30002)MD. ANWAR HOSSAIN (29087)

16th- 17th Century 18th Century 19th Century 20th Century

Agriculture & Local Regional

Trade

Coffee & Sugar Production

Started the Growth of

Private Entrepreneurshi

p

Oil Boom, Rapid Growth, FDI

21st

Chronological Survey of Indonesian Economy..:

Growing Industry

Introduced with Modern Technology

Production of steel, and cement got momentum

Increased the Crossed

Border Trade

Change of Economic Policies

The First Deregulation Policies

Devaluation of Rupiah by 10% against

USD

Political Reformation of Indonesia..:

President Suharto came Power in 1966

Oil Embargo by OPEC…….

1972

1973

1974

1977

1979

1981

1983

1985

1990

0 2 4 6 8 10 12 14 16 18

0.966000000000001

1.56

5.08

7.15

9.02

15.73

11

7.16

5.27

Crude Petroleum Export of Indonesia (1972-1990 in USD Billion)

Oil Price Rose to

$12 from $3 per Barrel

Reshaped the Fortune

of Indonesia

Reshaped the International Position of Indonesia

Exported 1+ Million

Barrels per Day

Oil Revenue Contributed to 70% of Budget in

1980s

Oil Boom also Led to Corruption,

Political Repression &

Inflation

Inflation of Indonesia after 1970s:

The New Order Government

Successfully Reduced it

Because of Oil Boom it hiked

33.3%

Government’s great efforts reduced the inflation to single digit

During the 1980s, Government cut the deficit in its current account balance to control the inflation.

Economic Reformation of Indonesia in 1980s-1990s Oil Price Started to Fall at 1982 Devaluation of Rupiah in 1983

Export Earnings of Oil Decreased Third Deregulation Policy in 1986

2nd Deregulation Debt Repayment Became Difficult FDI & Manufacturing Export

Foreign Direct Investment of Indonesia 1970-1992

THE ASIAN FINANCIAL CRISIS:The Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.

The crisis started in Thailand (well known in Thailand as the Tom Yum Goong crisis) with the financial collapse of the Thai baht after the Thai government was forced to float the baht due to lack of foreign currency to support its fixed exchange rate, cutting its peg to the U.S. dollar, after exhaustive efforts to support it in the face of a severe financial over-extension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.

Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong Kong, Laos, Malaysia and the Philippines were also hurt by the slump.

THE INDONESIAN CRISIS BEGINS:• Although the Asian region showed worrying signs, foreign investors initially kept confidence

in the Indonesian technocrats‘ ability to weather the financial storm (as they had done before in the 1970s and 1980s). But this time, however, Indonesia would not get off scot-free. It became the hardest-hit country because the crisis not only had economic but also significant and far-reaching political and social implications.

• When pressures on the Indonesian rupiah became too strong, the currency was set to float freely starting from August 1997. Soon it began depreciating significantly. By 1 January 1998, the rupiah's nominal value was only 30 percent of what it had been in June 1997. In the years prior to 1997 many private Indonesian companies had obtained un-hedged, short-term offshore loans in dollars, and this enormous private-sector debt turned out to be a time bomb waiting to explode. The continuing depreciation of the rupiah only worsened the situation drastically. Indonesian companies rushed to buy dollars, thus putting more downward pressure on the rupiah and exacerbating the companies' debt situation. It was certain that Indonesian companies (including banks; some of which were known to be very weak) would suffer huge losses. New foreign exchange supplies were scarce as new loans for Indonesian companies were not granted by foreign creditors. As the government of Indonesia was unable to cope with this crisis it decided to seek financial assistance from the International Monetary Fund (IMF) in October 1997.

Indonesian GDP and Inflation 1996-1998:

     1996    1997    1998

 GDP growth (annual percent change)

    8.0     4.7   -13.6

 Inflation growth (annual percent change)

    6.5    11.6    65.0

THE IMF ARRIVES AND CHAOS CONTINUES:

• The IMF arrived in Indonesia with a bailout package totaling USD $43 billion to restore market confidence in the Indonesian rupiah. In return it demanded some fundamental financial reform measures:– the closure of 16 privately-owned banks, – the winding down of food and energy subsidies, and – it advised the Indonesian Central Bank (Bank

Indonesia) to raise interest rates.

• The second IMF agreement (January 1998): This second IMF agreement contained a detailed 50-point reform program, – including provisions for a social safety net, – a gradual phasing out of certain public subsidies and – the tackling of Suharto's patronage system by ending monopolies of a

number of his cronies.The IMF indeed made errors in its initial approach to the Indonesian crisis but

it did come to realize that the key in overcoming this crisis was to restart private capital flows to Indonesia. In order for this to happen the patronage system had to be broken down.

• A third agreement with the IMF was signed in April 1998.– large food subsidies for low-income households were granted– The budget deficit was allowed to widen.– The privatization of state-owned companies, faster action on bank

restructuring, a new bankruptcy law and a new court to handle bankruptcy cases.

A fourth agreement with the IMF. It was signed in June 1998 and allowed the budget deficit to widen further while new funds were pumped into the economy. Within the time span of a couple of months there were some signs of recovery. The rupiah began to strengthen from mid-June 1998 (when it had fallen to 16,000 rupiah per dollar) to 8,000 rupiah per dollar in October 1998, inflation eased drastically, the Jakarta stock exchange started to rise and non-oil exports started to revive towards the end of the year.

The banking sector (center of the crisis) remained fragile as the numbers of non-performing loans were high and banks were very hesitant to loan money. Moreover, the banking sector had caused a sharp increase in government debt as this debt was primarily due to the issuance of bank restructuring bonds. But, albeit fragile, the country's economy improved gradually through 1999, partly due to an improving international environment which caused a rise in export revenues.