The rupiah has lost over 83 percent of its value in the last seven months alone, and the domestic market is having extreme difficulty adapting to the devaluation. The current exchange rate hit 14,550 to the dollar on January 22. Bills of 10,000 rupiah (less than US$1) are common, bills of 20,000 (less than $2) are rare, and bills of 50,000 (less than $5) exist, but they might as well not, since hardly anybody ever sees one. Changing a US$100 bill in Indonesia gets you a six-inch-thick stack of 10,000 and 5,000 rupiah bills, underscoring the seriousness of the recent inflation. The government is (wisely) not printing larger bills, for fear of sparking hyperinflation.
Even if the average Indonesian can escape the rising tide of unemployment, the inflation has made salaries increasingly worthless. One Indonesian I interviewed told me that even with his steady job, he didn't know if he could feed his family from month to month. One taxi driver said that although sometimes he made "OK" money driving his cab, some weeks would go by without earning a dime. There have been numerous demonstrations in Jakarta, with sporadic violence breaking out, although it has been muted to date. The armed forces have issued a warning that election-time violence is possible, and despite the army's tendency to overestimate security concerns for its own interest, this warning should not be ignored.
Obviously, the problem must be addressed, and the IMF bailout provides both a short-term solution in the form of quick cash, and a long-term solution in the form of wholesale reform of the economy. The immediate cash payments will allow Indonesia to repay some of its more pressing short-term loans. But far more important will be the long-term reforms and liberalizations in many industries, including banking and several important agricultural products. Already, liberalization of the financial industry is having effects, as a January 20 announcement of a major merger of five mid-sized banks demonstrates.
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