Dangerous Impact on Monetary Crisis

Dangerous Impact on Monetary crisis

Considering the current slump in the economy, many have equated it with the monetary crisis that hit Indonesia in May 1998. The crisis brought Indonesia to its worst state. It could be said that Asian countries also experienced adversity, but the one that experienced the most adversity was Indonesia.

A monetary crisis, also known as a financial crisis, is a situation in which asset prices experience a sharp decline in value, businesses and consumers are unable to pay their debts, and financial institutions experience a liquidity shortage. Monetary crises are often associated with panic, in which investors sell assets or withdraw money from savings accounts because they fear that the value of these assets will decrease if they remain in financial institutions. 

Other situations that may be termed "financial crises" include the bursting of a speculative financial bubble, a stock market crash, a government default, or a currency crisis. A financial crisis may be confined to a bank or spread throughout a single economy, the economy of a region, or economies around the world.

The main cause of the monetary crisis was the fall in the value of the rupiah against the US dollar. Whereas in June 1997, the exchange rate of the rupiah against the dollar was still very low, only Rp. 2,380 per dollar. Suddenly, in January 1998, the dollar strengthened to touch a level of Rp 11,000 Then in July 1998, the rupiah continued to decline, reaching US$1, equivalent to Rp. 14,150. 

On December 31, 1998, the rupiah strengthened slowly but only managed to increase from Rp 8,000 to US$1. The lowest point was in September 1997. Another reason was a large number of private foreign debts. As of March 1998, the total foreign debt was recorded at US$138 billion, of which US$72.5 billion was private debt. Worse yet, two-thirds of it is short-term debt that matures in 1998. The third reason is the crisis of confidence in the market and society due to the government's fickle policy in dealing with the crisis. 

On the other hand, President Soeharto's deteriorating health made the succession uncertain. As a result, foreign investors were reluctant to provide financial assistance quickly. The last reason is that the solutions offered by the International Monetary Fund or the International Monetary Fund cause customers to make massive withdrawals of funds. This condition made banks limited in providing loans, while Bank Indonesia had to disburse a lot of funds to prevent the crisis from getting worse.

The monetary crisis had a huge impact on Indonesia. In the economic and banking sectors, the significant drop in the value of the rupiah caused the capital market and money market to collapse. High-interest rates have also caused several banks in Indonesia to go bankrupt. Government debt securities were also classified as junk. 

The 1998 crisis also made the selling price of goods soar. Several small and large companies were also affected by the monetary crisis. It is noted that about 70% of companies are bankrupt in the capital market. This condition then forced industry players to lay off workers, which caused a huge wave of unemployment that affected as many as 20 million people.

The high unemployment rate coupled with the declining purchasing power of the people contributed to the increase in the poverty line. In 1998, per capita income was reported to have shrunk to 610 dollars.