Imf Threatens To Cancel $43bn Aid

The International Monetary Fund has told President Suharto that it will pull out of a $43bn rescue package for Indonesia if he presses ahead with his plan to peg the rupiah to the dollar.

IMF officials confirmed reports that Michel Camdessus, the fund's managing director, wrote last week to warn Suharto that, if he went ahead, the IMF would withdraw its backing for the aid package, which includes $5bn from the government's own resources.

Prabhakar Narvekar, an IMF consultant who met Suharto on Friday, said: "My impression is that he is still very favourably disposed to it." He said, however, that the president had not mentioned a date for introduction of a currency board. Steve Hanke, the US economist who persuaded Suharto to move ahead with a currency board, said: "We anticipate it will go forward without any problem, unless the IMF can come up with a better alternative." Hanke, who flew to Jakarta at the weekend, said the Indonesian president appeared committed to his plan. Indonesian officials and many analysts have said Indonesia cannot sustain a currency board without the stand-by credits of the IMF package to back its $17bn currency reserve. Hanke would neither confirm nor deny that. He said he believed some Japanese and German banks supported his proposal, but their governments are believed to back the IMF. The most urgent reason for a currency board is to enable the government to continue importing and subsidising rice, sugar, milk and stove fuel - all of which have become scarce and shot up in price - and thus avert more social unrest in the country, where food riots have been spreading fast.

"The social structure of Indonesia cannot take high inflation, let alone hyperinflation," Hanke said. "We are looking at hyperinflation." One banker said: "Indonesia's problem so far has been that when things get tough, this government wiggles. Suharto is a man who signed a 60-page document with the IMF and did not read it."