Imf Rescue Strategy Backfired Report Says Bank Closings Helped Bring Indonesia’s Financial System To Brink Of Collapse

A confidential report by the International Monetary Fund on Indonesia’s economic crisis acknowledges that an important element of the IMF’s rescue strategy backfired, causing a bank panic that helped set off financial market declines in much of Asia.

In minute detail, the report describes how political paralysis in Indonesia was compounded by a misjudgment at the IMF’s Washington headquarters on how the Indonesian people would react to bank closings. Instead of inspiring confidence as hoped, the closings helped bring Indonesia’s banking system to the brink of collapse, sending depositors fleeing even from relatively healthy banks and hastening a further plunge in the country’s already battered currency.

The report, distributed to IMF members last week, does not imply that the IMF bears any responsibility for worsening Indonesia’s crisis. It attributes most of the blame to President Suharto’s government, which it strongly criticizes for failing to enact promised reforms in exchange for the $40 billion international rescue effort.

Suharto’s resistance to the economic changes demanded by the IMF resulted in warnings from the Clinton administration and from the lending agency last week that aid might be cut off. This, in turn, helped cause the nation’s currency, the rupiah, to plunge and raised fears of political and social ferment in Indonesia, the world’s fourthmost-populous country.

That is one reason President Clinton dispatched a team of top officials to meet with Suharto earlier Tuesday, in hopes of stabilizing Indonesia’s finances before the country’s troubles spread further.

IMF officials declined Tuesday to comment on the report, which came as the agency’s Asian remedies are put under increased attack, particularly from political leaders throughout the region.

IMF and Clinton administration officials say publicly that the only way to truly clean up Asian economies is to dive into market reforms, however painful this may be in the short run.