Problem with monetary evangelicals<\/p>\n
By Bondan Winarno<\/p>\n
JAKARTA (JP): Indonesians did not like what they saw on
\ntelevision. President Soeharto signing an agreement with the
\nInternational Monetary Fund (IMF), as its director, Michel
\nCamdessus, looked sternly on with crossed arms.<\/p>\n
Former Jakarta governor turned dissident, Ali Sadikin, said
\n\"Soeharto is bad all right, but he is my president. Camdessus was
\ntreating my president like he was his colonial master.\"<\/p>\n
Then came Steve Hanke peddling the virtues of a currency board
\nsystem (CBS) to the government of Indonesia. He took center stage
\nat President Soeharto's residence, where Camdessus had been just
\na few days before, when he briefed Soeharto on the wonderful
\nworld of currency boards. \"A CBS is the only way to end
\nIndonesia's crisis\", Hanke later remarked to the press.<\/p>\n
Smooth talking, wearing academic looking spectacles, he later
\ngave a lecture on currency boards to a hoard of Jakarta
\njournalists, with convincing credibility. Momentarily, the
\njournalists forgot that Hanke moonlights as a currency trader.<\/p>\n
Indeed, Hanke did not even correct Jakarta newspapers which
\nhailing him as the \"father of CBS\", when in fact it is a concept
\ndating back to the British Empire. The first currency board was
\nestablished in Mauritius in 1849 and the system reached its peak
\nin the late 1940s.<\/p>\n
Currency boards were abandoned in favor of central banks as
\ncolonial empires receded. However, when central banks became
\nsusceptible to government pressure to finance excessive deficits,
\ncurrency boards were revived. Approximately seventy countries
\nnow subscribe to CBS in its modern form.<\/p>\n
Hanke wrote his first book on currency boards with Kurt
\nSchuler in 1991. Milton Friedman is among contemporary economists
\nwho view CBS as a possible monetary system for Eastern Europe and
\nthe Third World. Many even believe that fixed exchange rates
\nmight become the way of the future.<\/p>\n
To me, Hanke sounds like an apocalyptic preacher. He came
\npromising heaven to those who for too long have been staring at
\nthe gate to hell. Choose CBS now, lest Armageddon come in four
\nmonths.<\/p>\n
To worsen the appearance of hell, Hanke forecast inflation
\nrunning at 1000 percent this year, but he did not substantiate
\nthis claim.<\/p>\n
Peter F. Gontha, a business associate of one of President
\nSoeharto's sons, quickly denied any role in arranging the meeting
\nbetween Hanke and President Soeharto. People now believe that it
\nwas Mohamad (Bob) Hasan, a timber tycoon closely linked to
\nSoeharto, who rang Hanke when the latter was on holiday in
\nIstanbul.<\/p>\n
Hasan has a reputation for this sort of covert operation.
\nWhatever the truth, Hanke won Soeharto's ear. Hanke believes a
\ncurrency board can do no wrong. \"There has been no history of a
\nbad currency board system anywhere in this whole world\", he said
\nduring an interview with TVRI, the government-owned television
\nstation.<\/p>\n
In the same interview, Hanke strongly stated that there is no
\ntechnical conflict between CBS and the IMF. \"A CBS... complements
\nthe IMF package,\" he said.<\/p>\n
However, moments later he said that the \"IMF sets
\npreconditions for Indonesia to achieve stability... But, the
\nrupiah will collapse before stability is attained\", in blatant
\ncontradiction to his earlier statement.<\/p>\n
In the interview, Hanke also questioned why conditionality
\nattached to an IMF loan to Bulgaria required the recipient
\ncountry to adopt a currency board, while the IMF strongly opposed
\na currency board in Indonesia. Perhaps Hanke was correct to make
\nthis reference, but it is nevertheless misleading.<\/p>\n
In an article in Kontan, Jakarta's weekly economic newspaper,
\nProf. Emil Salim pointed out that Bulgaria is a case apart from
\nIndonesia. When a currency board was introduced in Bulgaria, the
\nbanking system was in good order. \"We can have a CBS in
\nIndonesia, but with the banking system in its present state, we
\nwill all sink,\" Salim said.<\/p>\n
That a CBS does not contradict IMF reforms is not quite
\naccurate. In fact, the IMF just reaffirmed that it will cancel
\nthe aid package if Indonesia introduces a currency board. The G-7
\nmeeting in London also called on Indonesia to delay a CBS.<\/p>\n
Behind the dogmatism, Hanke's logic, when discussing CBS, must
\nbe treated with care. He stated that with CBS \"interest rates
\nwould fall because of increased credibility\". There are two flaws
\nin that statement.<\/p>\n
There is no evidence to suggest that interest rates fall in
\nresponse to improved credibility. Furthermore, there is the
\nmatter of credibility itself. Hypothetically, a currency board
\nwill improve credibility, but if the government hold insufficient
\ncurrency reserves to manage a currency board, then credibility
\nwould quickly disintegrate.<\/p>\n
Hanke's rhetoric makes it sound like no brain is required to
\nrun the system. \"It is very restrictive and disciplined. It runs
\non an automatic mechanism,\" he said. So can one fall asleep at
\nthe wheel?<\/p>\n
A currency board will, according to supporters, give Indonesia
\na credible mechanism with which to defend a fixed exchange rate.
\nThe cost will be loss of control over monetary policy. There is
\nalso confusion over the specifics of the proposed system.<\/p>\n
Many people fail to distinguish between a fixed exchange rate
\nand a pegged exchange rate, which are different entities. Holding
\nthe exchange rate constant is the top priority in a fixed
\nexchange rate regime. Under a pegged system, other policy tools
\nsuch as the interest rate are also considered and the term 'peg'
\nalludes to a certain mobility in exchange rates -- a fixed but
\nadjustable exchange rate system.<\/p>\n
The currency board system being touted for Indonesia is
\ndefinitely a fixed exchange rate regime with very restrictive
\nrules. But a fixed exchange rate can be achieved without a
\ncurrency board. Indonesia has used a fixed exchange rate regime
\nfor two decades without a currency board.<\/p>\n
A currency board can also come under different guises.
\nSingapore's Board of Commissioners of Currency is a currency
\nboard which does not fix the exchange rate -- Singapore uses a
\nmanaged float regime.<\/p>\n
For Indonesia, the question is whether to fix or to peg the
\nrupiah. A return to a free floating currency is almost certainly
\nout of the question.<\/p>\n
Popular argument has recently favored fixing the rupiah to a
\ndollar rate of exchange conducive to production and trading. This
\nwould be complemented by limiting the use of foreign currency to
\nthose with legitimate business needs to do so.<\/p>\n
Informed people in Indonesia now believe that Soeharto is
\nreconsidering his plan to introduce a currency board, but amid
\nall the speculation, one question still remains unanswered. Will
\nan Indonesian currency board lead to the demise of Bank
\nIndonesia?<\/p>\n
In Singapore, the central bank coexists with the Board of
\nCommissioners of Currency. One institution does not make the
\nother obsolete.<\/p>\n
In Hong Kong, the Exchange Fund (currency board) was
\nintroduced in 1985 after serious speculative attacks on the Hong
\nKong dollar. The exchange fund cooperated with the Banking
\nCommission, which had a mandate to supervise banking and
\nfinancial institutions in the territory, until 1993, when the two
\nwere merged to form the Hong Kong Monetary Authority (HKMA). The
\nHKMA is technically a central bank which performs extra currency
\nboard functions.<\/p>\n
There is no need to dissolve Bank Indonesia if it is capable
\nof taking on the extra functions required to run a currency
\nboard. In fact, if Indonesia opts for a fixed exchange rate
\nregime without a currency board, the role of the central bank
\nwill be vital.<\/p>\n
CBS, just like any other monetary system, has advantages and
\ndisadvantages. Suitability depends on a country's fundamentals. A
\ncurrency board may be appropriate for Indonesia, but for this to
\nbe true, certain prerequisites for success must be met. That all
\nthese prerequisites are present in Indonesian society is
\ndebatable. Furthermore, since Hanke is not the sole authority on
\ncurrency boards, Indonesia should take the time to listen to
\nother supporters and opponents of this controversial exchange
\nrate regime.<\/p>\n
The writer is a business consultant based in Jakarta.<\/p>\n
Window A: Popular argument has recently favored fixing the rupiah
\nto a dollar rate of exchange conducive to production and trading.
\nThis would be complemented by limiting the use of foreign currency
\nto those with legitimate business needs to do so.<\/p>\n
Window B: Informed people in Indonesia now believe that Soeharto
\nis reconsidering his plan to introduce a currency board, but amid
\nall the speculation, one question still remains unanswered. Will
\nan Indonesian currency board lead to the demise of Bank
\nIndonesia?<\/p>",
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