There are three main ways for a government to fund their projects. First, government revenue (i.e. tax and non-tax revenue). This is government’s main source to fund their development. In the case of Indonesia, tax (67%), oil and gas income (12.5%), and excise (10%) are the main source of government revenue.

During the oil boom era (1974-1981), oil, gas and related minerals contributed about two-thirds of government revenue. Then, due to end of oil boom in 1983 the oil price dramatically dropped causing significant fall of oil revenue for all net oil exporter countries, including Indonesia. Since that time, Soeharto realised that Indonesia could not rely on oil sector to support Indonesian development. Therefore, Soeharto tried to push private sector contribution on Indonesian economy by deregulating banking sector (i.e. Pakto 88 policy).

Second, debt. There are two types of government debt: foreign government debt (FGD) and domestic government debt (DGB). IMF money is categorised as the first one which is paid off since 2006, whereas ORI, SUKUK, SUN are the example of DGB. Prior 1998 Indonesia heavily depent on FGD but Post-crisis in 1998 the Indonesian government prefer to use DGB in order to avoid currency risk. Therefore, DGB is currently dominating 73 percent of total government debt, while FGD is relatively small about 27 percent. Moreover, Indonesia’s debt ratio (25%), i.e. the ratio of total debt over GDP, is much lower than Malaysia and Thailand (50%), UK and US (around 100%), or Japan (nearly 250%).

Third, the central bank creates new money. This is what Soekarno did when he built massive projects, e.g. Gelora Bung Karno (GBK), Parliament House and National Monument (Monas). Indeed, these projects needed huge amount of money. Consequently, inflation rocketed up to more than 600 percent in 1965. This is one of the reasons why Soekarno fell from his position because prices inflated significantly making people were worse off and pretty angry on government. No wonder if the first pretension of people movement in 1965-1966 known as “Tri Tuntutan Rakyat (Tritura)” was: deflate the prices!

Then, Soekarno fell and Soeharto was in power afterwards. Soeharto understood that hyperinflation was one of the key problems that had to be solved at the very beginning. Soeharto’s economic team, known as “Berkeley Mafia”, realised that creating new money through Bank Indonesia was one of Soekarno’s worst economic policies.

It was impossible for Soeharto’s administration to rely on government revenue or domestic debt due to economic and political crisis at that time. Hence, the economic team had to find other ways to fund Indonesian development. The only way was just relying on foreign debt.

Although the 1965-66 crisis was over: inflation dropped to 10 percent and politic became much more stable, Soeharto’s administration were still loaning from other countries or international organisations despite rapid increase in the foreign direct investment (FDI).

Before the monetary crisis in 1998, Indonesian economy in general performed very well. Even, Indonesia was called as one of the “Asian Tiger”. However, crisis in 1998 messed it all. Rupiah fell from about Rp3,000 per USD to be more than Rp16,000 per USD in June 1998. Consequently, many companies failed to pay its foreign debt (debt default) causing plenty banks in Indonesia collapsed and bankrupted. Eventually, it created a great broken banking system and a severe monetary crisis in Indonesia.

Soeharto had no choice. The only way to help Indonesia from this crisis was by asking help from the International Monetary Fund (IMF). Indonesia loaned more than 9 billion USD to support for adjustment and reform programs. Since that time, many Indonesians blame to IMF for their intervention on many Indonesia’s policies.

Do you still remember a very iconic picture, which was Michel Camdessus-Former IMF Managing Director folded or crossed his arms and stood up behind Soeharto-Indonesian second president? This picture is a bit like saying “Sign it!”. I think this is how probably most Indonesian people see IMF: a developing countries’ dictator, the agent of western imperialism, etc.

Michel Camdessus and President Suharto


Some economists argued that IMF’s prescriptions brought Indonesia into deepen and worse crisis, although some others said it was successful. Pro-side argues IMF’s interventions were successful because it could make rupiah and inflation stabilised. There are at least four IMF’s reform agenda on Indonesia economy post-1998 which were tight monetary policy (i.e. increasing the interest rate), austerity policy (i.e. reducing budget deficit by cutting oil and food subsidy), food security (i.e. massive food import) and banking sector reform (e.g. liquidating bad banks).

In fact, these agenda implied good results. Inflation dropped significantly, rupiah and price of rice became much more stable, foreign exchange reserves and market sentiment (i.e. falling in risk premia) recovered gradually. However, reform in banking system and corporate restructuring were very slow, even it triggered the Bank Bali Scandal implying the IMF program was suspended in September 1999. In addition, IMF itself admitted that their prescription about financial system restructuring contributed to a massive run on the Indonesia’s banking system implying further weakening the economy.

In contrast, Cons-side argues IMF failed to stabilise or re-boost the GDP and prevent many workers unemployed. In 1998, GDP contracted by more than 10 percent than before crisis and unemployment was tenfold. In addition, Cons-side also argued that other countries who did not follow IMF’s advices in 1997-1998 (e.g. Malaysia and South Korea) had a better and faster recovery than Indonesia and Thailand implementing IMF’s solutions.

Moreover, the timing of IMF’s market-based prescriptions (e.g. cutting fuel and food subsidy) was wrong because it triggered “a IMF riot” in Indonesia. Stiglitz explains that IMF’s package neglected two things: Indonesia’s institutions were very weak and asymmetric information in Indonesia was very high. No doubt that many Indonesia’s (economic) problems are mainly caused by internal factors (e.g. corruption, bad governance and imprudent policies) than external factors (e.g. IMF’s intervention). Yet, we frequently blame to others than solve our home works. Just like what Indonesia’s ancient proverbs says “Buruk Muka, Cermin Dibelah” (i.e. like an ugly man blames his mirror).