The extemal conditions of the Indonesian economy have deteriorated in recent years. The drop in oil prices in 1986 led to a high current account deficit and has caused a remarkable drop in the Govemment oil revenues. The depreciation of the US-Dollar against other important currencies has contributed to the deterioration of Indonesia’s terms of trade and has worsened the extemal debt situation. The Indonesian Govemment reacted to this new situation by a drastic devaluation of the Rupiah, and together with some reforms in the trade policy, this has led to higher non-oil exports. The increased debt burden forced the govemment to cut domestic expenditure, including a reduction of the development budget and a freeze of the public servants’ salaries. By the reform of the tax system the Govemment is trying to reduce its dependence on the oil revenues. The intensified mobilisation of internal financial resources and a more efficient use of public funds is hampered by corruption. After the drop in oil prices the handicap of the industrialization strategy pursued during the oil boom became obvious. The high degree of protection has led to monopoly rents and to the high cost structure of the Indonesian economy which hampers the increase of non-oil export income. Some reforms in the trade policy and the investment control regulations represent important counter-measures. How the Indonesian economy will perform under the deteriorated external condi- tions will depend on how effectively the further measures of the reform policy are implemented.