Indonesia - Money

The first decades after independence were marked by rampant inflation, as Sukarno's government printed money as needed. After Suharto's New Order government took power in 1965, the so-called Berkeley Mafia of U.S.-trained economists was able to bring inflation under

control through tight control of fiscal and monetary policy . An exception was the sudden surge of oil wealth that sent inflation soaring to 40 percent. Inflation was brought back under 10 percent by 1978, but in the meantime exports fell due to the combination of inflation and a fixed exchange rate .

To facilitate the exporting of goods at competitive prices, the government lowered the value of the rupiah 50 percent in 1978, and again in 1983 and 1986. After that devaluations of about 5 percent a year were allowed. Until the crisis of 1997, the government tried to limit exchange rate fluctuations to within this range (a policy called a "managed float"). Between 1990 and 1996 the rupiah depreciated by an average of 3.9 percent. This stability encouraged investment, as investors knew that their profits would not be eaten up by inflation. It also encouraged domestic businesses to borrow money in foreign currencies such as the dollar (reaching almost US$80 billion), which would prove disastrous for them once the rupiah crashed. In August 1997, after seeing neighboring countries try and fail to keep their currencies stable, the government announced it could no longer pursue the managed float policy. Exchange rates fell from Rp2,500=US$1 in July 1997 to Rp17,000=US$1 in June 1998, before improving to Rp8,000=US$1 later that year. Indonesia does not maintain capital controls, and foreign exchange may be freely converted and can flow in and out of the country unrestricted. As part of the recovery strategy, the International Monetary Fund required Indonesia to raise interest rates to bring back foreign investment.

The first stock exchange was set up in Jakarta (then known as Batavia) in 1912, though it was closed during World War II. After independence an exchange was established in 1952, only to be shut down by a program of nationalization in which the government took over private companies. In 1977 the modern Jakarta Stock Exchange was opened, first under government control and later privatized. Growth was slow at first, with only 24 traded companies by 1987. By 2000, only 278 companies have been listed, most of them owned by the company founders with small amounts of public ownership.