Rupiah will be pegged to fixed exchange rate<\/p>\n
JAKARTA (JP): Indonesia will soon establish a currency board
\nsystem (CBS) to stabilize the shattered rupiah and is now
\nfinalizing legal and institutional frameworks to operate the
\nfixed peg arrangement, Finance Minister Mar'ie Muhammad confirmed
\nyesterday.<\/p>\n
"The primary objective of the system is to restore public
\nconfidence in the rupiah and the banking system," Mar'ie said at
\na meeting with the House of Representatives.<\/p>\n
The CBS is a monetary regime based on an explicit legislative
\ncommitment to peg the domestic currency to a foreign currency at
\na fixed exchange rate. Under this system, the domestic currency
\n(usually base money) in circulation is fully matched by foreign
\nexchange reserves.<\/p>\n
"The government will strictly control the growth of the money
\nsupply to curb inflation and restore an orderly and stable
\neconomic condition," Mar'ie said.<\/p>\n
Currency board arrangements, he said, could restore economic
\nstability which could in turn gradually push down bank interest
\nrates to reinvigorate economic activities.<\/p>\n
Vice Speaker Abdul Gafur said the House fully supported the
\nplan as it could quickly restore currency stability.<\/p>\n
Gafur, however, explained that the government could submit the
\nlegal framework for the CBS operations to the House as a draft
\ngovernment regulation rather than through draft legislation.<\/p>\n
President Soeharto has never publicly mentioned setting up a
\nCBS to stabilize the rupiah, but he disclosed at a meeting with
\nMoslem scholars Monday that he would soon announce new bold steps
\nfor the foreign exchange system to "kill" speculators.<\/p>\n
He did, however, mention the need for a fixed exchange rate
\nsystem to restore economic order.<\/p>\n
The rupiah surged to 7,400 against the U.S. dollar Tuesday
\nfrom Monday's close of 9,600 following reports on the plan to
\nimplement a CBS. The rupiah remained stable at 7,200 yesterday.<\/p>\n
Mar'ie did not give any details on how the board would
\noperate, including the timetable or which currency would be
\nchosen to anchor the rupiah.<\/p>\n
But his statement was the first official confirmation of
\nrumors that the government was preparing to set up a CBS to
\nstabilize the rupiah.<\/p>\n
Soeharto reportedly took a close look at the system after he
\nwas briefed here by American economist Steve Hanke last week.<\/p>\n
Bank Indonesia Governor Soedradjad Djiwandono said after a
\nmeeting with Soeharto on Monday that the President's Economic and
\nMonetary Resilience Council was still studying the advantages and
\ndisadvantages of the CBS.<\/p>\n
Steve Hanke<\/p>\n
Speaking from his office in Baltimore, Maryland, Steve Hanke
\nsaid Tuesday he was finalizing the plans for the CBS which could
\nbe up and running in Jakarta in less than three weeks.<\/p>\n
Hanke, an American professor who was appointed special adviser
\nto a top Indonesian economic policy council, said he would return
\nto Jakarta this week at Soeharto's request to finalize details of
\nthe fixed exchange rate system.<\/p>\n
"I'm returning to Indonesia and will be going through the
\nfinal scrub-down and my own due diligence," he was quoted by
\nReuters as saying. "It clearly can be done in three weeks. We've
\ndone it before and in Indonesia it technically can be done in
\nless time than that."<\/p>\n
Officials with the International Monetary Fund and the World
\nBank said they needed more time to review the plan. The Clinton
\nadministration had no immediate comment.<\/p>\n
"We're open minded," said chief World Bank spokesman Mark
\nMalloch Brown. "It's not within the World Bank's competence to
\ncomment on immediate short-term exchange rate issues. That's for
\nthe IMF."<\/p>\n
"Our point is we must look seriously at it, and obviously
\nthere will be a presumption that if the markets take it
\npositively and it enjoys the authority of the Indonesian
\ngovernment it can contribute to achieving stability, a goal we
\nall want," he added.<\/p>\n
Malloch Brown said the bank was backing away from its earlier
\ncomments, which were highly critical of the proposal to peg
\nIndonesia's battered rupiah to a fixed exchange rate.<\/p>\n
An IMF spokesman in Washington declined to comment on the
\ncurrency board proposal, but a fund official in Singapore
\nappeared to cautiously welcome the concept.<\/p>\n
"I think it's an interesting proposal and worth exploring,"
\nsaid IMF director Kunio Saito. "But it's important to explore all
\nthe pros and cons before finalizing the policy."<\/p>\n
Rp 5,000 per dollar<\/p>\n
Hanke said his rough calculations would place the rupiah peg
\nat about 5,000 to the U.S. dollar, but this figure would depend
\non additional information from the Indonesian central bank.<\/p>\n
Analysts are divided on whether it would be a smart move for
\nIndonesia.<\/p>\n
P.K. Basu, director of regional macroeconomics at the Union
\nBank of Switzerland, said a currency board should help the
\ncountry recover economically.<\/p>\n
Others say a CBS would not be appropriate for Indonesia, even
\nthough it had worked in Hong Kong, Argentina, Estonia, Bosnia and
\nBulgaria.<\/p>\n
A currency board effectively replaces the central bank system,
\na move that would go against the agreement signed by Soeharto on
\nJan. 15 with the IMF to give more autonomy to the central bank.<\/p>\n
Hanke said he believed Soeharto was serious about adopting a
\ncurrency board.<\/p>\n
The American economist has advised Argentina, Estonia and most
\nrecently Bulgaria on implementing currency boards.<\/p>\n
The architect of the Hong Kong dollar peg, John Greenwood,
\nsaid yesterday that a currency board system for Indonesia would
\nbe feasible but difficult to put into practice.<\/p>\n
Greenwood, chairman and chief economist at LGT Asset
\nManagement, said in Hong Kong there was a risk the currency board
\nidea was only being used as a political weapon as Indonesia faced
\nan election overshadowed by the financial meltdown.<\/p>\n
"There is a risk that it is something being used as a
\npolitical weapon to deal with a political problem, namely the
\nelection," he said.<\/p>\n
Greenwood said a currency board required "a highly flexible
\neconomy and a political system that is preconditioned to allow
\nthe currency board system to remain active."<\/p>\n
Indonesia would additionally need to address problems
\nregarding the solvency of the banking system. "It is difficult to
\nenvision a currency board system where the payments system is not
\noperating satisfactorily," he said. (08\/vin)<\/p>",
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