Indonesia: Selected Issues

International Monetary Fund
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International Monetary Fund
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Published on
Mar 19, 2015
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Business & Economics / International / Economics
Business & Economics / Money & Monetary Policy
Political Science / Public Policy / Economic Policy
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In 1971, President Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the U.S. dollar. Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.


Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.

Currency wars have happened before-twice in the last century alone-and they always end badly. Time and again, paper currencies have collapsed, assets have been frozen, gold has been confiscated, and capital controls have been imposed. And the next crash is overdue. Recent headlines about the debasement of the dollar, bailouts in Greece and Ireland, and Chinese currency manipulation are all indicators of the growing conflict.

As James Rickards argues in Currency Wars, this is more than just a concern for economists and investors. The United States is facing serious threats to its national security, from clandestine gold purchases by China to the hidden agendas of sovereign wealth funds. Greater than any single threat is the very real danger of the collapse of the dollar itself.

Baffling to many observers is the rank failure of economists to foresee or prevent the economic catastrophes of recent years. Not only have their theories failed to prevent calamity, they are making the currency wars worse. The U. S. Federal Reserve has engaged in the greatest gamble in the history of finance, a sustained effort to stimulate the economy by printing money on a trillion-dollar scale. Its solutions present hidden new dangers while resolving none of the current dilemmas.

While the outcome of the new currency war is not yet certain, some version of the worst-case scenario is almost inevitable if U.S. and world economic leaders fail to learn from the mistakes of their predecessors. Rickards untangles the web of failed paradigms, wishful thinking, and arrogance driving current public policy and points the way toward a more informed and effective course of action.

From the Hardcover edition.
KEY ISSUES Context. Raising growth and ensuring long-term fiscal sustainability remain the two critical issues of the FSM. The reform agenda, in particular, the tax reform package and growth-enhancing reforms, hinges on achieving a national consensus in a loosely federated nation. Outlook. The economy stagnated in FY2014 (ending September) with real growth estimated at 0.1 percent, reflecting a slowdown in the implementation of infrastructure projects. Inflation dropped to 0.7 percent in FY2014 on account of falling oil prices. The current account strengthened due to a tax windfall from a company’s sale of shares launched on a foreign stock exchange and an increase in fishing license fees. Growth in FY2015 is expected to remain almost flat at 0.3 percent, while damages caused by the recent typhoon Maysak could dampen the economy. Fiscal sector. The authorities have started some reforms in view of the expiration in 2023 of grants provided under the Compact of Free Association with the U.S. State governments have started fiscal consolidation while the Unified Revenue Authority (URA) has been established. The authorities agreed that more needs to be done to achieve fiscal sustainability, in particular, by implementing the tax reform package that includes replacing the state sales taxes with a VAT. They noted that further reforms hinge on achieving a national consensus. Investment climate. Land tenure issues continue to constrain private sector development and the authorities should redouble efforts in expediting the land survey and registration process. On tourism, the authorities expressed optimism that the recent extension of the runway at the main island airport in Pohnpei could lead to more eco- tourism that preserves the cultural heritage and pristine nature of the country. Financial sector. Credit unions are currently not being supervised and a new legislation is underway to put them under the supervision of the Banking Board. The authorities have requested further TA from PFTAC and the Legal Department of the Fund.
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