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The iconic photograph of International Monetary Fund (IMF) Managing Director Michel Camdessus standing over then-President Suharto with his arms folded like a disapproving schoolteacher came to symbolize the eventual downfall of the long-serving Indonesian leader.
It was Jan. 15, 1998, deep into the calamitous Asian financial crisis, and the IMF had finally arm-twisted Suharto into signing a US$43 billion bailout agreement which effectively precipitated the collapse four months later of his 32-year New Order regime.
Perhaps less well-known was the role of then US President Bill Clinton in convincing Suharto to accept the IMF’s package of austerity measures, including the death knell of the Timor national car project and clove monopoly, both controlled by his youngest son, Tommy Suharto.
While Clinton’s intervention wasn’t a secret, the transcript of three recently declassified phone conversations shows just how persuasive the US leader was in convincing Suharto he had to bite the bullet as the rupiah fell from 2,500 to more than 16,000 to the US dollar.
In the end, the reforms only worsened the crisis, with acerbic Australian Prime Minister Paul Keating – who had formed close ties with the Indonesian leader – claiming the US Treasury “quite deliberately used the economic collapse as a means of bringing about the ouster of Suharto.”
Former US Secretary of State Lawrence Eagleburger had a similar assessment after Suharto’s dramatic resignation on May 21, 1998: “We were fairly clever in that we supported the IMF as it overthrew [Suharto]. Whether that is a wise way to proceed is another matter.”
Even the unapologetic Camdessus, whose schoolmaster-manner at the signing ceremony left a lasting impression among many embarrassed Indonesians, said at the time of his retirement: “We created the conditions that obliged Suharto to leave his job.”
The release of the transcripts and other US documents from that era comes just two months before more than 15,000 delegates gather for the annual IMF-World Bank Group conference in Bali, the fourth time the summit has been held in Southeast Asia.
Worryingly for current President Joko Widodo in the build-up to the 2019 elections, the rupiah is now at 14,490 to the dollar, the highest level since the 1997-98 crash, despite the central bank’s spending of $12 billion in recent months to prop up the currency.
That’s especially worrying considering the government’s high levels of US-dollar denominated debt. While nobody is saying that history is ready to repeat itself, a shaky economy and falling currency could have political ramifications for Widodo if not contained ahead of next April’s presidential and parliamentary polls.
Clinton first called Suharto on Jan. 8, 1998, to urge him to support economic reforms and to keep interest rates high until the rupiah began to stabilize. He also volunteered the services of Treasury Deputy Secretary Larry Summers as a consultant to help in the reform process.
The following day, the leaked documents show, Indonesian trade and industry minister Tunky Ariwibowo told US ambassador to Jakarta Stapleton Roy that Suharto was impressed with Clinton and his insights on how the international community viewed the Indonesian situation.
Another call followed on Jan. 15, with Suharto outlining detailed plans for implementing the IMF agreement and reforming the central and private banking systems, then in turmoil after the closure of 16 privately-owned banks triggered a run on the rest of the country’s financial institutions.
The US president telephoned Suharto for a third time from Camp David on Feb. 13, this time to oppose the establishment of a currency board, then being actively promoted by American economist Steve Hanke, which Clinton said the US and other G7 countries all believed would risk “everything that you have achieved.”
“If markets go after the board, it would create a run that seriously depletes Indonesia’s reserves and complicates the efforts of the IMF and the international community to provide support,” he warned. “It would drive up interest rates, lead to the collapse of the banks and the banking system and make it easier for speculators to move against the rupiah.”
Clinton said although currency boards had worked in some countries, it would not in Indonesia. A better course of action, he suggested, would be to strengthen the banking system, resolve private sector debt and continue to implement the IMF’s reforms.
Turning to what he called the “political component“ of restoring money market confidence, he said: “As you and I have discussed many times before, it is important to maintain openness and broad public participation in the political system to maintain growth and your impressive record of accomplishments.”
In response, Suharto complained that nothing seemed to be working and the situation was getting worse, despite the government spending $10 billion of its already badly-depleted foreign exchange reserves to shore up the rupiah. “If we continue to intervene, we will exhaust our reserves,” he said.
The Indonesian president said that while a currency board was under consideration, he shared Clinton’s concern about the “great risk” involved. But he added in obvious frustration: “If the currency board is not introduced, what is the alternative? How do we stop the rupiah’s fall?
“We need to make a decision soon as the people are demanding that their president do something to fix the situation and save the country,” he went on, urging Clinton to get the G7 to pay more attention to the crisis. “The Indonesian people see the IMF as a savior too late.”
In the end, Suharto dropped the currency board idea, but over the next three months political events finally overtook him, culminating in the targeted shooting of four protestors at Jakarta’s Trisakti University, which in turn triggered riots and looting across the Indonesian capital.
One newly-released document tells of a meeting between US officials and opposition leader Megawati Sukarnoputri on April 4, 1998, in which there was general agreement that the IMF plan would benefit Suharto in the short term, but would challenge his power in the long term. It was another example of how far off the mark most assessments were at the time.
In hindsight, as long as the economy stayed on track, Suharto was secure. Even internal intelligence assessments saw him retaining power in 2009, at which point he would have been 88 years old. No-one quite foresaw, however, how quickly it could all unravel – at the same bewildering pace as the tumbling rupiah.