Credible fixed rate 'vital to CBS success'<\/p>\n
JAKARTA (JP): The biggest questions Indonesia has to answer
\nbefore adopting the currency board system (CBS) are at what fixed
\nrate will the rupiah be pegged to the U.S. dollar and which money
\ncategory will be covered by the system, a director at Bank
\nIndonesia has said.<\/p>\n
Miranda Gultom told a seminar yesterday that the key to the
\nsuccess of the CBS was the credibility of its fixed foreign
\nexchange rate.<\/p>\n
"That is because every demand (on the U.S. dollar) must be
\nhonored," she said at the meeting organized by the Golkar faction
\nof the House of Representatives.<\/p>\n
She added it was very crucial that the CBS be based on a
\nspecial law to strengthen its credibility and autonomy.<\/p>\n
She said a pegged exchange rate regime used by the central
\nbank before it wholly floated the rupiah last August did not have
\nto be supported by a special law since the central bank could
\nstill intervene in the foreign exchange market to influence the
\nexchange rate.<\/p>\n
"Under a CBS, such a move is not possible," she pointed out.<\/p>\n
Finance Minister Mar'ie Muhammad confirmed at a meeting with
\nthe House of Representatives on Wednesday that the government was
\nfinalizing the legal and institutional frameworks for the
\nintroduction of a CBS to stabilize the rupiah rate.<\/p>\n
The rupiah has strengthened against the dollar after the
\ngovernment declared it would set up a CBS. The currency rose from
\nthe 9,000 level last week to a range of 7,400 to 7,600 this week.<\/p>\n
A CBS is a monetary regime based on an explicit legislative
\ncommitment to exchange domestic currency for a specified foreign
\ncurrency at a fixed exchange rate.<\/p>\n
The CBS idea surfaced last week after President Soeharto was
\nbriefed by U.S. economist Steve Hanke on the advantages of
\nIndonesia implementing a currency board arrangement to stabilize
\nthe shattered rupiah.<\/p>\n
Miranda added that another key question in preparing the CBS
\nwas which of the money categories -- M1 (bank notes, coins and
\ndemand deposits) and M2 (M1 plus time deposits and similar
\ninstruments) -- would be covered, taking into account the
\ngovernment's foreign reserves of US$19 billion.<\/p>\n
She explained that the M1 supply now totaled Rp 73 trillion
\nand the M2 supply totaled Rp 378 trillion.<\/p>\n
She said if the rupiah was fixed at 5,000 to the American
\ndollar with only M1 covered, then only $14 billion in foreign
\nreserves would be required to match the currency. But if the
\nfixed rate was designed to cover M2, at least $80 billion in
\nforeign reserves would be needed.<\/p>\n
"Bank Indonesia and the finance ministry are now addressing
\nthese questions," she said.<\/p>\n
In Washington, a spokesman for the International Monetary Fund
\n(IMF) said the fund was holding talks with Indonesia concerning
\nthe "the requirements for the successful use of a currency board
\narrangement".<\/p>\n
"These discussions are likely to be going on for some time and
\nwe have nothing firm to say for the time being," the spokesman
\nwas quoted by AFP as saying Wednesday.<\/p>\n
However, U.S. Treasury Secretary Robert Rubin on Wednesday
\ndisplayed little enthusiasm for Indonesia's CBS plans.<\/p>\n
Rubin made no secret of his reservations, telling reporters
\nfollowing a Congressional hearing that Indonesia must deal with
\n"a lot of issues" before it considers a currency board.<\/p>\n
"I think the focus right now ought to be on the other issues
\nthat you have to work through before you even get to the question
\nof a currency board.<\/p>\n
"I think there are issues with respect to the banking system.
\nI think there are a lot of other issues that go to the question
\nof having credibility adhering to reform programs, having the
\ncredibility in the financial markets that I think underpin a
\ncurrency board."<\/p>\n
Jakarta's plans to follow the Hong Kong model and set up a
\ncurrency board to stabilize the rupiah, which has been battered
\nby the Asian financial crisis, have been met with criticism by
\nmany economists.<\/p>\n
A major Australian bank added its voice yesterday to doubts
\nabout a fixed exchange rate for the Indonesian currency.<\/p>\n
Commonwealth Bank of Australia managing director David Murray
\nsaid a peg to a foreign currency could boost short-term
\nconfidence in Indonesia but would not cure the rupiah's ills.<\/p>\n
"It may be okay for some time but in the long term there's no
\ngood argument for fixing exchange rates," he told reporters after
\ndelivering a speech in Melbourne.<\/p>\n
In the short term, a fixed exchange rate could give Indonesian
\ncompanies greater certainty in trying to repay foreign currency
\ndebt and also restore some price stability, he said.<\/p>\n
"But, over the long term, there's not much point," Murray
\nsaid.<\/p>\n
But Neil Saker, head of regional economic research for SocGen-
\nCrosby in Singapore, said Indonesia's CBS plan is the last chance
\nfor the country to stop its currency from a free fall.<\/p>\n
"This is the last chance. It has to be supported totally.
\nThere is no option," Saker told a news conference on Asia's
\neconomic crisis. (08)<\/p>",
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