CBS: A cure-all or experiment?<\/p>\n
By Joe L. Spartz<\/p>\n
JAKARTA (JP): Whether the proposed currency board system
\nultimately turns out to be a Damocles sword or a panacea for the
\nailing rupiah depends on a number of factors and conditions.<\/p>\n
They are sufficient foreign currency funding, pegging rates,
\npublic trust and credibility, ability of the banking sector to
\ncope with its implementation and, last but not least, strict
\nsafeguards in order to minimize inevitable abuse of the system.<\/p>\n
As a condition sine qua non, the system would require the full
\nbacking of the local money supply, estimated at Rp 400 trillion
\nby foreign currency reserves.<\/p>\n
Existing foreign currency reserves, however, add up to less
\nthan US$20 billion. And in view of the IMF's outright opposition
\nto an early CBS introduction, the bail-out package for Indonesia
\nmay have to be renegotiated for a number of key areas.<\/p>\n
Unless mechanics, timing and implementation of the currency
\nboard system (CBS) can be worked out in a manner acceptable to
\nthe IMF, committed bail-out funds are unlikely to be included in
\nthe foreign reserve back-up of the local currency.<\/p>\n
A possible scenario would be a short-lived Icarus flight
\ncrash-landing shortly after a high-flying CBS take-off, leaving
\nthe country's entire financial system worse off than before, with
\ndollar exchange rates exceeding disastrous Rp 20,000 levels.<\/p>\n
In addition to the CBS's funding problem, an unrealistic
\ndollar peg could well contain the seeds of the CBS's self-
\ndestruction. Pegging the dollar at the government's overly
\noptimistic Rp 5,000 budget rate would inevitably trigger a
\nmassive dollar buying spree, whereas fixed exchange rates of
\n10,000 would result in further bankruptcies and massive lay-offs.<\/p>\n
Both public trust and the system's credibility, without which
\nthe CBS is doomed to fail, represent additional obstacles to
\novercome.<\/p>\n
As evidenced by financial market reactions following its
\ninitial announcement, this condition remains largely unfulfilled
\nand could possibly jeopardize the entire CBS plan.<\/p>\n
Even though no detailed mechanics or operating guidelines of
\nthe system were disclosed to the public, the rupiah initially
\nstrengthened by about 30 percent overnight in the expectation
\nthat the government would proceed with its CBS plan regardless.<\/p>\n
The short-lived rebound of the rupiah, alas, did not signify a
\npublic trust in the proposed system and both financial and
\nbusiness managers soon voted with their feet to the next money
\nchanger, driving the rupiah down to its erstwhile levels.<\/p>\n
Likewise, the spread between dollar buying and selling rates
\nhas returned to its previous 50 percent level, which does not
\naugur well for the claimed cure-all remedial benefits of the CBS.<\/p>\n
Another no-less critical obstacle to any CBS implementation
\nwould be its ensuing and inevitable abuses. A cheaper dollar
\nwould represent an irresistible lure for large businesses and
\nconglomerates with major unhedged offshore loans to liquidate or
\nreduce their foreign debts with heavily subsidized dollars.<\/p>\n
Foreign exchange reserves would be depleted at an astonishing
\nrate with rupiah bank interests, over which the central bank
\nwould have lost all means of intervention, would unavoidably
\nreach dizzying heights.<\/p>\n
A currency board system, if properly conceived and
\nimplemented, would definitely go a long way in stabilizing the
\nrupiah. Drastic measures are unquestionably needed to halt the
\nfree-fall of the rupiah and to restore a heavily undervalued
\ncurrency to more realistic levels.<\/p>\n
Adopting a blue-print of the Hong Kong CBS model for Indonesia
\nwould, in all probability, lead to its early and potentially
\ndisastrous demise and only a strictly tailored CBS version would
\nhave a chance to succeed.<\/p>\n
Rather than providing a free-for-all fixed foreign currency
\nexchange, the proposed CBS should be restricted in scope with
\npegged forex facilities limited to selected productive or
\nemployment-generating business sectors only.<\/p>\n
Speculative transactions such as rupiah hedging, bank loans
\nand financial instruments, rather than actual rupiah deposits
\nexchanged at fixed CBS rates and so forth should be strictly
\nexcluded from any CBS facilities.<\/p>\n
Likewise, CBS exchange facilities should not provide for the
\nfinancial bail-out of already completed and no-longer employment-
\ngenerating projects, which would at any rate represent a direct
\nviolation of the IMF agreement.<\/p>\n
For these, both foreign lenders and local debtors should face
\nthe music on their own and CBS fixed exchange facilities limited
\nto productive and employment-generating activities of the private
\nsector, where they belong.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/cbs-a-cure-all-or-experiment-1447893297",
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"sponsor_url": "https:\/\/okusiassociates.com"
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