Temporary relief for rupiah<\/p>\n
The tighter money policies launched by Bank Indonesia (BI) on
\nTuesday, though rather overdue, have succeeded in shoring up the
\nrupiah, which earlier fell to a five-year low of Rp 11,800 to the
\nAmerican dollar in the morning, to Rp 10,525 at the afternoon
\nclose. The local unit strengthened further to Rp 10,400 on
\nWednesday.<\/p>\n
Bank Indonesia raised its BI Rate by 75 basis points to 9.5
\npercent and its one-week overnight rate by 100 basis points to
\n8.5 percent and signaled a steep rise shortly in banks'
\ncompulsory reserve requirements at the central bank and more
\nintensive monitoring of foreign exchange transactions.<\/p>\n
All this aims at soaking up excess liquidity on the market and
\nconsequently reduce the ammunition for speculative trading on the
\nlocal unit.<\/p>\n
President Susilo Bambang Yudhoyono's special pronouncement on
\nTuesday that he and the central bank would be introducing on
\nWednesday night a new package of concerted measures to beef up
\nthe rupiah also help allay the public's concern that the
\ngovernment's economic policy-making machinery was in disarray.<\/p>\n
The President seemed to have realized that the daily
\noperations of the financial market run on perceptions and not on
\neconomic fundamentals that change on a monthly basis. Market
\nperceptions can change from day to day because they are formed by
\ninformation and statements from the government and political
\nleaders.<\/p>\n
The central bank is really in a dilemma about how it manages
\nthe rupiah rate. The interest rate policy can be used only
\nsparingly in view of its devastating impact on the state budget,
\nin view of the Rp 647 trillion (US$65 billion) in government
\nbonds already issued. Much higher interest rates would also
\nsabotage the nascent consumption-fueled recovery and further
\nchoke businesses.<\/p>\n
Bank Indonesia is also prudent for having refrained from too
\ndeep intervention into the market when the rupiah came under
\nstrong speculative attacks over the last two weeks because such a
\nmeasure would waste the limited stock of its precious foreign
\nreserves -- worth about $32 billion.
\n After all, the root cause of the fall is the negative market
\nsentiment with regards to the government's policy-making
\ncapability and its fiscal sustainability.<\/p>\n
A stronger enforcement of the central bank's ruling of April
\n2000 on foreign exchange (forex) transactions is also welcomed.
\nThe ruling requires all citizens and foreigners holding stay
\npermits and Indonesians residing overseas to submit to Bank
\nIndonesia through their banks much more detailed report documents
\non every forex transaction in excess of $10,000. This up-to-date
\nreporting will provide the central bank with accurate,
\ncomprehensive and timely data on forex deals to enable it to have
\na better view of the position of the external balance and
\ninternational investment, a prerequisite for devising effective
\nmonetary policies.<\/p>\n
Highly commendable though was that the government, in spite of
\nthe devastating impact of the rupiah's free-fall, did not resort
\nto slapping forex controls as these would be draconian measures
\nthat could cause total panic and chaos.<\/p>\n
As the President observed on Tuesday, the current condition
\nhas little resemblance to the situation that preceded the 1998
\neconomic and political crisis.<\/p>\n
What we are facing now is a crisis of confidence in the
\ngovernment and its fiscal management that set off a run on the
\nrupiah as people scrambled to protect their savings and rupiah
\nassets. What has been taking place in the currency market since
\nAug. 18 is a flight to quality but it is not yet a flight to
\nsafety -- as was the panic that occurred in early 1998 when
\npeople dumped their rupiah at whatever rate for the dollar.
\n However, this crisis, if not resolved once and for all, could be
\nself-fulfilling and escalate into a panic.<\/p>\n
Monetary measures by the central bank alone will not be enough
\nto maintain a stable rupiah at the desired level of 9,500 for
\nthis year and 9,400 for next year unless the government acts
\nfirmly and immediately to remove the uncertainties about its
\nfiscal management.<\/p>\n
The package of measures President Susilo must announce should
\ntherefore stipulate: Clear-cut, definitive scheduling for the
\nphasing-out of fuel subsidies by gradually floating domestic fuel
\nprices on international market quotations; a credible mechanism
\nof social safety nets for the poor to help them weather the
\ngeneral price rises within the coming months; and more concrete
\nmeasures to improve the investment climate and help businesses
\ncut costs.<\/p>\n
Anything short of this package would leave the economy highly
\nvulnerable to high oil price fluctuations, which are entirely
\nbeyond the government's control.<\/p>\n
As we have repeatedly argued in this column, the billions
\ndollars wasted annually for fuel subsidies for the middle and
\nhigh-income group could have been invested far more usefully in
\neducation, health services and rural infrastructure.<\/p>",
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"sponsor": "Okusi Associates",
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