Monetary reform could pay divident<\/p>\n
By Peter Duncan<\/p>\n
JAKARTA (JP): Indonesia is about to embark on the most far-
\nreaching monetary reform of its half century of existence as an
\nindependent nation. It is being discouraged from taking this step
\nby an impressive array of conventional banking and business
\nauthority and wisdom from the IMF, the World Bank and national
\nleaders down through economists and analysts to the ever-
\narticulate brokers and fund managers.<\/p>\n
This reform, the establishment of a Currency Board System
\n(CBS), will have the following benefits: First, it holds out the
\nprospect of basically sound businesses being able to meet their
\ndebt payments. Second, it will eliminate Bank Indonesia's central
\nbanking function of lender of last resort to government, other
\nbanks, state enterprises, commodity boards, national business
\nprojects, and well connected businesses. Third, it will leave two
\nrump components of Bank Indonesia -- one to deal with bank
\nsupervision reporting and statistics, and the other to manage
\nwhatever is left of BI's assets after it has handed over a clear
\nUS$12-15 billion to the new Indonesian Monetary Authority. These
\nassets could become part of the assets of the Indonesian Bank
\nRehabilitation Authority. All of these benefits are in line with
\nthe intentions of the GOI\/IMF agreement.<\/p>\n
Doubters of the CBS should put their fears behind them and
\nback establishing a strong and orthodox CBS with the sole
\nfunctions of exchanging rupiah currency for U.S. dollars at a
\nfixed rate and managing the CBS reserves in conservative U.S.
\ndollar denominated securities.<\/p>\n
The proposed Currency Board System (CBS), provided it is an
\northodox one, is a simple mechanism for converting the existing
\nand future Indonesian currency stock into greenback rupiah --
\nyes, U.S. dollars -- but just the currency, not the rest of M1
\nand M2. The question most troubling those who fear adoption of
\nthe CBS is will it work? That is can it survive? They fear that
\nholders of rupiah (notes and coins) and claims on rupiah
\n(deposits) will decide that this is their last, best chance to
\nget real U.S. dollars at a good price, say Rp5,000 if that is the
\nagreed strike price. That is twice what a dollar cost in rupiah
\nless than six months ago but much less than the cost in rupiah
\nonly a few weeks ago.<\/p>\n
If there is such a flight to the U.S. dollar, rupiah currency
\nwill soon command a premium. Notes will come from wherever they
\nare hiding and migrate to the CBS until there are few rupiah left
\nin the system for day to day business. We would then have to
\nconduct our daily business in greenbacks and barter or pay a
\npremium to get hold of rupiah currency.<\/p>\n
But why should such flight occur? There are three main groups
\nof holders of rupiah and claims on rupiah. First, the business
\nelite, bankers, foreign debt holders, corporates and business
\ngroups. Second, the business middle class, traders, owners of
\nsmall enterprises, operators of schools, households, and other
\ninstitutions. Third, the bewildered masses who receive a pittance
\nof salary or wages and spend most of it within days of receiving
\nit.<\/p>\n
The first and second groups have done most of what they can
\nalready to get out of rupiah and claims on rupiah, but they still
\nmay lead another wave of flight from the rupiah. This would
\ncontract the currency available and thereby tighten money supply
\nacross the banking system. The third group has no choice but to
\naccept that what little cash savings they have are at least
\nhalved in value and that they will have to live on maybe half or
\nless of what they have survived on before -- until such time as
\nthe economy gets back to business as usual.<\/p>\n
The government has two major problems of communication to
\nface. First, convincing the elite and middle business groups that
\nRp5,000 to the U.S. dollars is fixed, come what may. Second,
\nconvincing the bewildered masses that rioting, looting and shop
\nburning will only delay the process of recovery to real living
\nstandards comparable with those of less than a year ago.<\/p>\n
The only way to convince the elite and middle business groups
\nthat the CBS will work and will be here to stay is to commit to
\nit irrevocably with ironclad safeguards.<\/p>\n
Convincing the masses to suffer peacefully will not be such an
\neasy task. But surely that is what part of the US$39 billion of
\nthe IMF Plus Package should be used for -- to ease the transition
\nfrom subsidized prices held in check in spite of much too rapid
\ngrowth in money supply (permitted by Bank Indonesia as a central
\nbank) to market determined prices in line with international
\nprices -- as well as to finance the recovery and back the debt
\nrepayment of banks and corporates.<\/p>\n
Why are the IMF, WB and other interested parties not backing
\nthis necessary and tough decision? Perhaps because they fear the
\nloss of power, authority and prestige that comes with pulling
\ndown the walls of the temple of central banking. Or because they
\nfear the contagion effect of giving up sovereignty over monetary
\nmanagement to the U.S. Federal Reserve Board.<\/p>\n
Or because they are worried that a fixed link to the U.S.
\ndollar will tie the rupiah to shifts in the U.S. dollar against
\nthe currencies of other countries, most notably Japan and China,
\nand thereby distort development of trade and investment with
\nthese countries. Surely, the prospect of a fixed exchange rate
\nfor the rupiah instead of the present chaos should outweigh these
\nconcerns.<\/p>\n
The writer is chief economist of the Castle Group.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/monetary-reform-could-pay-divident-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }