Forex controls would create new problems<\/p>\n
Debate on the possible adoption of foreign exchange controls
\nto stabilize the rupiah's exchange rate is heating up after
\nMalaysia imposed such a system earlier this month. Economist Kwik
\nKian Gie discusses the possible impacts of the proposed plan.<\/p>\n
JAKARTA (JP): After economist Paul Krugman delivered a speech
\nand Malaysia decided to impose a controlled foreign exchange
\nregime, there was lively public discourse last week on the
\npossibility of Indonesia following in Malaysia's steps. But how
\nthe regime would work, what impacts it might cause and what goal
\nmight be achieved were not clearly discussed.<\/p>\n
Such a regime offers several grades of rigidity. If Indonesia,
\nfor example, adopts the most rigid system of capital control, no
\ncitizens will be allowed to keep any foreign currency on them.
\nAnyone holding foreign currency would be required to sell it to
\nBank Indonesia, the central bank, at a designated conversion
\nrate.<\/p>\n
As a consequence, exporters will have to convert foreign
\ncurrency they have earned into rupiah at the central bank.
\nViolations of such a requirement would be regarded as a criminal
\nact subject to punishment.<\/p>\n
What may happen then? The government would convert part of the
\ndeposited foreign currency into rupiah. Indonesians depositing
\ntheir foreign currency at foreign banks will surely be reluctant
\nto convert their money into the domestic currency.<\/p>\n
Considering that many Indonesians have deposited their foreign
\ncurrency at banks in other countries, particularly during the
\nlast 14 months of economic crisis, hundreds of billions of
\ndollars -- far exceeding the level of the government's foreign
\nexchange reserves -- owned by Indonesian citizens will remain
\nbeyond the control of the government.<\/p>\n
Exporters will have to convert their foreign currency into
\nrupiah because they generally receive the prices of their goods
\nthrough letters of credits (L\/Cs). But they will underprice their
\ngoods in a bid to reduce the amount of money they will have to
\nconvert into rupiah. They will save the difference in overseas
\nbanks.<\/p>\n
Importers, on the other hand, will overprice the goods they
\nimport, so they can obtain larger allocations of dollars that
\nthey will be allowed to buy from the central bank. They will then
\ndeposit the dollar surplus in foreign banks.<\/p>\n
Anticipating the possibility of such practices, the government
\nwill introduce control prices on millions of export and import
\ncommodities, so that the government can calculate the amount of
\ndollars it will receive from exporters and determine the amount
\nthat it can sell to importers.<\/p>\n
Such bureaucracy will retard the flow of goods and force the
\ngovernment to expand its bureaucracy, which, in turn, will lead
\nto corrupt practices, such as the introduction of illegal levies
\nand the commercialization of power to control prices.<\/p>\n
Because the proposed foreign exchange controls are aimed at
\nstabilizing the rupiah's conversion rate -- so that manufacturers
\ncan afford to buy foreign currency at relatively low prices --
\nthe government will also have to sell it at the designated
\nprices. But will the government have adequate amounts of foreign
\ncurrency to meet the demand, not only for imports but also for
\noverseas travel, health care, schooling etc?<\/p>\n
Realizing that Indonesia's balance of payments has always been
\nwell in the red in the past year, the government will have to
\ntightly select from the millions of applicants wanting to
\npurchase foreign currency every day. This, again, will be a
\nprocess vulnerable to corruption.<\/p>\n
Because the government will strictly limit the official sales
\nof foreign currency for the purpose of benefiting the country,
\naffluent people who need foreign currency will buy at a higher
\nconversion rate than owners depositing their money in overseas
\nbanks -- which will be beyond the government's control.<\/p>\n
Such transactions will surely lead to an illegal or black
\nmarket -- as happened at Pasar Baru in Central Jakarta during the
\nOld Order government -- if the amount is small. If the amount is
\nlarge, the seller will issue a personal cheque for the buyer, who
\nwill be able to cash it at the seller's bank in a foreign
\ncountry.<\/p>\n
Thus, there will be two markets, an official one providing
\nforeign currency at low prices, and an illegal or black one
\ncharging higher prices.<\/p>\n
Imports of luxury goods will be paid with money from the black
\nmarket and brought into the country as personal effects. If
\ncustoms officers do not believe the owners' claim that the goods
\nare presents from friends overseas, the owners will offer them
\nbribes.<\/p>\n
Then, what is the use of foreign exchange controls originally
\naimed at protecting the government's foreign exchange reserves
\nand curbing inflation? Practically, as proven during the Old
\nOrder era, prices of imported goods will remain high because they
\nwill be set on the basis of foreign exchange values quoted on the
\nblack market.<\/p>\n
The underpricing of exports and the overpricing of imports
\nwill distort statistics on international trade. Furthermore, the
\nselection of people eligible to buy foreign currency and the
\nintroduction of control prices for exports and imports will
\nrequire bureaucratic expansion, which will undoubtedly lead to
\nfurther corruption.<\/p>",
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