Survey of recent developments

Economic recovery remains hostage to politics, with the diverse coalition that makes up the cabinet unable to provide strong and effective government. There has been a high turnover of ministers, and the governor of the central bank has been placed in detention. Communal violence continues on a large scale, and law and order appears to be deteriorating. The economy has been growing modestly, but investment spending-the most basic indicator of confidence in Indonesia's near-term economic prospects-remains far below pre-crisis levels. Inflation has increased appreciably in recent months because of significantly faster base money growth. The central bank appears more concerned to prevent interest rate rises than to meet the money growth targets in the government's recent Letters of Intent to the IMF. The rupiah has been depreciating quite rapidly since late 1999. While this is usually blamed on growing political uncertainty and continuing social unrest, concern about weakening monetary discipline is also likely to be a factor. The disappointing outcome of the recent sale of government shares in Bank Central Asia calls into doubt the whole approach to bank restructuring. The new minimum level of capital adequacy is far too low, and the extent of bank recapitalisation has been overstated by virtue of the recapitalisation bonds having interest yields well below market rates. The attempt to devolve power away from the central government seems bound to run into enormous difficulties. The major problem is the last minute decision to push many government functions down to the level of districts/municipalities, bypassing the provinces. In important respects the push for regional autonomy may prove to be more apparent than real, with many at the centre reluctant to give up their power and authority, but in some cases where true devolution does occur it may be highly disruptive.