Stable rupiah needed for recovery<\/p>\n
The rupiah remains very weak, even after the central bank
\nsignificantly increased its promissory note rates last week.
\nEconomist Kwik Kian Gie discusses the necessity to stabilize the
\ncountry's foreign exchange system.<\/p>\n
JAKARTA (JP): The press has devoted pages to efforts to
\novercome the economic crisis but no substantial breakthrough has
\nbeen made yet.<\/p>\n
President Soeharto, in his accountability speech before the
\nPeople's Consultative Assembly on March 1, for example, invited
\nthe International Monetary Fund (IMF) and foreign heads of
\ngovernment to help formulate measures that would lower the U.S.
\ndollar's value against the rupiah and keep it stable at a proper
\nlevel. Such measures would be implemented on top of the reforms
\nsponsored by the IMF; the combination of the measures and the
\nreform Soeharto called IMF-plus.<\/p>\n
The President then said he was considering very carefully
\nwhether to implement a currency board system (CBS). However, IMF
\nmanaging director Michel Camdessus said a few days ago that the
\nIndonesian government had decided not to adopt the CBS. The
\ngovernment did not deny that statement.<\/p>\n
So, what concept will now be used to stabilize the rupiah's
\nvalue at a proper level?<\/p>\n
Bank Indonesia Governor Sjahril Sabirin then raised interest
\nrates on the central promissory notes (SBI) to a maximum of 45
\npercent per annum with the aim of pushing down the dollar's value
\nand curbing inflation.<\/p>\n
When interest rates are high, people are expected to deposit
\ntheir money at commercial banks. As the rupiah supply then
\ndecreases, demand for the dollar and thus its value should
\ndecline. The dollar's value did decline slightly in the following
\ndays. But will this measure be effective in the long term and
\nlower the dollar's value to Rp 5,000? No one can be confident of
\nthis.<\/p>\n
Sjahril's predecessor, Soedradjad Djiwandono, repeatedly
\nraised interest rates to prevent the dollar appreciating. When
\nthe dollar surged drastically after the central bank's
\nintervention band was lifted and the rupiah allowed to float,
\nSoedradjad raised SBI interest rates to 30 percent per annum and,
\nin response, the dollar declined slightly. But he was then
\npressured by businesspeople and Soeharto to lower interest rates
\nagain. As a result, the dollar strengthened again.<\/p>\n
As longer-term SBIs offer lower interest rates than one-month
\ncertificates, it can be expected that the rates will be lowered
\nagain in line with the dollar's gradual decline to an ideal
\nlevel. But won't people rush to dollars again if deposit rates
\nare cut and the dollar's value falls to Rp 7,000?<\/p>\n
Another question is whether the increase in SBI interest rates
\nwill help curb inflation. The answer is that the rate increase
\nwill encourage people to put their funds in banks, which will in
\nturn reduce the money supply. Banks are not supposed to channel
\ntheir funds to productive sectors but use them for buying SBIs.
\nOnly illiquid banks will be willing to risk losses by using
\npublic funds, which are subject to high interest rates, for
\nbuying SBIs. Money-losing banks will, sooner or later, have to be
\nclosed down or salvaged by the Indonesian Bank Restructuring
\nAgency. But how can the government, which guarantees banking
\nliabilities, afford to cope with the banks' increasing bad loans,
\nthat will surely increase further due to rising interest rates?<\/p>\n
Another bit of good news has emerged -- an agreement on the
\nsettlement of the private sector's foreign debt using Mexico's
\n1983 debt settlement as a model, under which debt principal
\nrepayment was suspended for four years.<\/p>\n
Some questions arise from this however. For example, will the
\ndebtor companies, most of which are currently on the verge of
\nbankruptcy, still exist in four years' time if the dollar does
\nnot weaken?<\/p>\n
Will new credits flow into the country as soon as the old debt
\nproblem is settled? It does not seem likely. Then, how can the
\nIndonesian economy survive, considering that the country, whose
\ncurrent account always shows a deficit, has been largely
\ndependent on foreign investment since 1966. Poverty will surely
\nstrike hard and deep, bypassing only the elite of high-ranking
\ngovernment and military officials and politically well-connected
\nbusinesspeople.<\/p>\n
What is the reality behind the Mexican model of debt
\nsettlement? Mexico's economic crisis in the early 1980s was
\nactually settled by a single country, the United States. The
\nassets of Mexican debtor companies were taken over and used to
\nrepay their debts to their creditors, most of whom were American.
\nThat was why many Mexican companies were acquired by U.S.
\nbusinesspeople.<\/p>\n
Even if Indonesians are willing to have their companies
\nacquired by foreign creditors, the value of the companies'
\nassets, in rupiah terms, are generally lower than their dollar
\ndebts due to the sharp appreciation of the U.S. currency. So it
\nis how to see how the new foreign owners could benefit from the
\nacquired factories, which are too dependent on imported
\nmaterials.<\/p>\n
So, what is the best solution? There is only one alternative
\n-- fixing the rupiah or a managed float of it in the same way the
\ncountry has survived for the past 25 years. To back up such a
\nmeasure, the government should provide adequate reserves of
\nforeign exchange, which it could acquire from foreign creditors,
\nfor example, so that it can meet any rush on dollars.<\/p>\n
But the IMF's reform policy must also be implemented
\ncompletely. Otherwise foreign borrowing will become a time bomb.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/stable-rupiah-needed-for-recovery-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}