Postscript to the Survey of Recent Developments: On Causes and Cures for the Rupiah Crisis

The dramatic fall of the rupiah has been driven largely by panic, rather than by careful analysis of Indonesia's economic fundamentals The catalyst for the panic appears to have been a sudden reassessment of the exchange rate risk faced by unhedged domestic firms and foreign investors This reassessment was triggered by the abrupt decision of the That government to float the baht. The policy focus now must be on helping the private sector adjust to the floating rate environment, and aiming to maintain economic growth. Belt-tightening measures are counterproductive in these circumstances. The process of adjustment might be assisted by a clearly articulated decision by the government for Bank Indonesia (BI) to divest itself rapidly of a large portion of its foreign exchange assets, given that its need for them is greatly diminished in a genuinely floating regime.