Editing Fall of Suharto (section)

=== Monetary and financial crisis ===
{{Further|1997 Asian financial crisis}}
[[File:IDR USD exchange 1997-07-02 to 1998-05-21.png|thumb|240px|Indonesia followed the Kingdom of [[Thailand]] in abandoning the [[fixed exchange rate]] of its currency on 14 August 1997.{{sfn|''The New York Times''|1997| p = D6}} The [[Indonesian rupiah|rupiah]] further devalued to its lowest point following the signing of the second [[IMF]] letter of intent on 15 January 1998.]]

In the second half of 1997, Indonesia became the country hardest hit by the [[1997 Asian financial crisis]]. The economy suffered a flight of foreign capital leading to the [[Indonesian rupiah]] falling from Rp 2,600 per [[United States dollar|dollar]] in August 1997 to over Rp 14,800 per dollar by January 1998. Indonesian companies with US dollar-denominated borrowings struggled to service these debts with their rupiah earnings, and many went bankrupt. Efforts by [[Bank Indonesia]] to defend its managed float regime by selling US dollars not only had little effect on the currency's decline, but also drained Indonesia's foreign exchange reserves.{{sfn|Enoch|Baldwin|Frécaut|Kovanen|2001| p = 23}} Weaknesses in the Indonesian economy, including high levels of [[debt]], inadequate financial management systems and [[crony capitalism]], were identified as underlying causes. Volatility in the [[global financial system]] and over-liberalization of international capital markets were also cited. The government responded by floating the currency, requesting [[International Monetary Fund]] assistance, closing some banks and postponing major capital projects.{{sfn|Aspinall|Klinken|Feith|1999| p = 1}}

In December 1997, Suharto for the first time did not attend an ASEAN presidents' summit, which was later revealed to be due to a minor [[stroke]], creating speculation about his health and the immediate future of his presidency. In mid-December, as the crisis swept through Indonesia and an estimated $150&nbsp;billion of capital was being withdrawn from the country, he appeared at a press conference to assure he was in charge and to urge people to trust the government and the collapsing rupiah.{{sfn|Friend|2003| p = 313}}

Suharto's attempts to re-instil confidence, such as ordering generals to personally reassure shoppers at markets and an "I Love the Rupiah" campaign, had little effect. Another plan was the setting up of a [[currency board]], proposed by the then special counselor [[Steve Hanke]] from [[Johns Hopkins University]]. The next day, the rupiah went up by 28% against the US dollar on both the spot and one year forward market, hearing the proposed plan. However, these developments infuriated the US government and the [[International Monetary Fund]] (IMF). Suharto was told – by both the [[president of the United States]], [[Bill Clinton]], and the managing director of the IMF, [[Michel Camdessus]] – that he would have to drop the currency board idea or forego $43 billion in foreign assistance.{{sfn|Hanke|2017}}

Evidence suggested that Suharto's family and associates were being spared the most stringent requirements of the IMF reform process, and there was open conflict between economic technocrats implementing IMF plans and Suharto-related vested interests, further undermining confidence in the economy.{{sfn|Aspinall|Klinken|Feith|1999|p=v}} The government's unrealistic 1998 budget and Suharto's announcement of Habibie as the next vice president both caused further currency instability.{{sfn|Friend|2003|p=314}} Suharto reluctantly agreed to a wider-reaching IMF package of structural reforms in January 1998 in exchange for $43&nbsp;billion in liquidity (with a third letter of intent with the IMF being signed in April of that year). However, the rupiah dropped to a sixth of its pre-crisis value, and rumours and panic led to a run on stores and pushed up prices.{{sfn|Friend|2003| p = 314}}{{sfn|Aspinall|Klinken|Feith|1999| p = v}} In January 1998, the government was forced to provide emergency liquidity assistance (BLBI), issue blanket guarantees for bank deposits, and set up the [[Indonesian Bank Restructuring Agency]] to take over management of troubled banks in order to prevent the collapse of the financial system. Based on the IMF recommendations, the government increased interest rates to 70% pa in February 1998 to control high inflation caused by the higher prices of imports. However, this action restricted the availability of credit to the corporate sector.{{sfn|McDonald|2008}}