Clutching at straws<\/p>\n
Among the proposals Indonesia has so far been toying with in
\nits desperate effort to stabilize and strengthen the rupiah, the
\none made by business leader Aburizal Bakrie to President B.J.
\nHabibie last Friday on the compulsory surrender of export
\nearnings by exporters to the central bank is the most insensible.
\nIts unfeasibility was matched only by the currency board
\narrangement with its fixed-rate system which then President
\nSoeharto mulled over in February as a quick-fix solution to the
\nbeleaguered rupiah.<\/p>\n
The business community and the government have understandably
\nbeen frustrated by the persistent volatility of the rupiah at a
\nrate now merely 20 percent as high as its value in July 1997.
\nMuch debate and analysis have been bandied back and forth on the
\nmain reasons behind the assault on the rupiah, yet most of the
\ngovernment programs now underway in cooperation with the
\nInternational Monetary Fund offer only a gradual recovery, and
\nwith very tough requirements.<\/p>\n
We could dismiss such a proposal simply as a publicity seeking
\ngimmick if the need for reimposition of foreign exchange control
\nwas voiced by a politician who does not understand the complexity
\nof the foreign currency market.<\/p>\n
It was strange, though, that the proposition was touted by
\nAburizal, chairman of the Indonesian Chamber of Commerce and
\nIndustry (Kadin). He was right in contending that nothing else
\nwould happen if the rupiah remained highly volatile at such a low
\nrate. But as a businessman and chairman of the widely diversified
\nBakrie Group, he should have realized that there is no quick fix
\nto stabilizing or strengthening a currency rate.<\/p>\n
The exchange rate of a currency is determined by the market
\nwhich in turn is influenced by a complex web of economic and
\npolitical factors. Market confidence is a precious commodity.
\nOnce lost, it is difficult to regain, especially because markets
\nhave long memories of a country that has been in trouble before.<\/p>\n
We rest assured, though, that President B.J. Habibie
\nimmediately dismissed Aburizal's proposition, allowing no time
\nfor the market to speculate. Habibie instead asked the business
\nleader to further debate it with experts or test its viability
\nand market acceptability through a poll of opinion.<\/p>\n
It is also quite encouraging to note that the central bank
\ngovernor has always steadfastly turned down suggestions for any
\nform of foreign exchange control, including the idea of a two-
\ntier currency market, which was touted earlier by some currency
\nanalysts.<\/p>\n
However it is defined, compulsory selling of export earnings
\nto the central bank is a form of foreign exchange control which
\nwill destroy one of the few most valuable assets Indonesia now
\ncan still offer to foreign businesspeople or investors -- free
\nforeign exchange or open capital account.<\/p>\n
Indonesia's experiences in the late 1960s and early 1970s and
\nthose of other countries in Asia and Latin America which had once
\nimposed foreign exchange control clearly testify to how such a
\nsystem has never been effective in beefing up foreign reserves or
\nstrengthening a currency rate.<\/p>\n
Foreign exchange control mostly failed in the 1970s and early
\n1980s, despite the fact international financial markets were not
\nas sophisticated and globalized as they are today.<\/p>\n
The biggest hurdle to any form of foreign exchange control is
\nthe ability of a government to implement it. It is surely doomed
\nto fail under the management of our government, notorious as one
\nof the most corrupt in the world. Moreover, exporters could
\nsimply under-invoice the prices of their exports to keep most of
\ntheir hard-currency earnings overseas, or over-invoice the prices
\nof their imports to transfer most of their dollars overseas. The
\ngovernment obviously would not have enough resources to inspect
\nmillions of foreign trade transactions to detect such practices.<\/p>\n
It is therefore most imperative, especially now when even the
\ngovernment itself relies on foreign loans for almost 50 percent
\nof its budget, that officials, businesspeople and analysts stop
\ntoying with so dangerous an idea of reimposing foreign exchange
\ncontrol.<\/p>\n
Any form of foreign exchange control would not only kill our
\nchance of getting new private capital inflow, but also scare away
\nforeign and national investors within the country. Without
\nprivate capital inflow, the rupiah will never stabilize or
\nstrengthen and our economy will never recover, however large the
\nofficial loans the government secured every year.<\/p>",
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"sponsor": "Okusi Associates",
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