Indonesian Financial Crisis Case Study

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The IMF's Negative Role in the Indonesian Financial Crisis of 1997 In 1997 and 1998, an exchange rate crisis in Thailand caused numerous negative and disastrous economic effects throughout Asia, but of all the countries affected, Indonesia was likely the most harmed (Ramli & Nuryadin 2007). Indonesia experienced a liquidity and banking crisis which lead to bankruptcy in most of the corporate sector and an economic contraction of 12.8 percent in 1998 (Ramli & Nuryadin 2007). In addition to the Thai currency crisis, other factors contributing to the crisis included the inability of policymakers to plan properly as well as severe structural weaknesses in the Indonesian economy (Ramli & Nuryadin 2007). But after the crisis occurred, the IMF…show more content…
The IMF even went so far as to argue against other organizations that were warning that a crisis loomed, such as ECONIT (Ramli & Nuryadin 2007). However, the Indonesian Rupiah was overvalued and this lead to an 18 percent loss in value against the US Dollar in August 1997 (Ramli & Nuryadin 2007). In response, Indonesian authorities decided to tighten the monetary supply, which lead to a liquidity crisis and worsened the situation (Ramli & Nuryadin 2007). Then, various policymakers began suggesting that the IMF get involved in the crisis, even though it probably made little sense to do so as the crisis was not bad enough to warrant it(Ramli & Nuryadin 2007). The IMF responded by providing a variety of loans with various restructuring requirements throughout Indonesia (Camdessus 1997). However, these reforms were largely unsuccessful because international lenders and IMF leaders did not put the interests of the Indonesian people first and some groups even wanted to teach the Indonesian people a lesson by allowing defaults to occur on loans, even though this wasn't the best option for the majority of the Indonesian people (Ramli & Nuryadin 2007). Additionally, the IMF severely misdiagnosed the problems related to the crisis which directly caused the liquidation of dozens of banks and collapsed the entire national…show more content…
The IMF is typically seen as the emergency room for economic problems(Ramli & Nuryadin 2007). If Indonesian leaders hadn't so quickly decided to ask the IMF for help, the crisis would not likely have worsened to such lows because investors wouldn't have lost so much confidence and run to the dollar so quickly, thus furthering the currency and banking crisis. But is the Indonesian political structure so strongly to blame? Or does the fact that the IMF so easily offer assistance when it is detrimental point to the incompetency of the IMF

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