Fall of Suharto - Monetary Crisis

Monetary Crisis

In the second half of 1997, Indonesia became the country hardest hit by the Asian economic crisis. The Indonesian rupiah dropped to almost 20% of its original value, causing huge debts on foreign currency and often short-term debt. Weaknesses in the Indonesian economy, including a high debt, poor financial management systems and crony capitalism, were identified as underlying causes. Other analysts cited volatility in the global financial system and over-liberalisation of international capital markets. The government responded by floating the currency, requesting International Monetary Fund assistance, closing some banks and postponing some major capital projects. Evidence suggested that Suharto's family and associates were being spared the toughest requirements of the reform process. There was open conflict between economic technocrats implementing IMF plans and Suharto-related vested interests.

In December 1997, Suharto for the first time did not attend an ASEAN presidents' summit, which was later revealed to be due to a minor stroke, creating speculation about his health and immediate future of his presidency. In mid December as the crisis swept through Indonesia and an estimated $150 bn of capital was being withdrawn from the country, he appeared at a press conference to assure he was in charge and to urge people to trust the government and the collapsing Rupiah.

Suharto's attempts to re-instill confidence, such as ordering generals to personally reassure shoppers at markets and an "I Love the Rupiah" campaign, had little effect. The government released a highly unrealistic budget which sent the Rupiah to below Rp. 10,000 to the US dollar (compared to Rp. 2,200 six months earlier). The currency decreased to Rp. 16,500 to the US dollar following Suharto's subsequent announcement that he would appoint Habibie as the next vice president. Suharto reluctantly agreed to a far wider reaching IMF package of structural reforms on 15 January 1998. However, the Rupiah continued on to drop to a sixth of its pre-crisis value, and rumours and panic led to a run on stores and pushed up prices.

Suharto's position as president remained solid for 30 years so long as the Indonesia economy grew strongly. When the economic crisis hit in 1997/98, Suharto's performance legitimacy disappeared and once strong support for Suharto disappeared both domestically and internationally.