Tracking capital flows<\/p>\n
Starting this month banks and their customers, including
\nforeigners holding stay permits and Indonesians residing
\noverseas, are required to prepare more detailed reports on all
\nforeign exchange (forex) transactions in excess of US$10,000.
\nThey have to disclose the identities of the remitter and
\nrecipient of these funds, the type and purpose of each
\ntransaction, and the financial relationship of the transactors.<\/p>\n
However annoyed bank customers might be with the additional
\npaperwork, they can rest assured that the new ruling has nothing
\nto do with any plan to impose forex control and that all reports
\nwill be kept confidential.<\/p>\n
Such documentation is necessary as banks are now required to
\nkeep detailed accounts of all forex transactions they conclude
\nfor themselves or on behalf of their customers and submit them in
\nmonthly reports to Bank Indonesia (central bank) beginning April
\n1. A technical mechanism is still being prepared for compulsory
\nreporting by nonbanking financial institutions, which typically
\naccounts for only less than 20 percent of total forex
\ntransactions.<\/p>\n
The new procedure implements Law No. 24\/1999 and is designed
\nto keep Bank Indonesia apprised of capital flows of foreign
\nexchange to and from the country and will enable it to adopt a
\nmore effective monetary policy. The compulsory reporting on forex
\ndeals was prompted by the financial crisis that hit the country
\ntwo years ago.<\/p>\n
When a massive run hit the rupiah immediately after the
\ncurrency's free floating in mid-August 1997, Indonesia's central
\nbank was completely in the dark when it came to understanding
\njust how much the country's need of foreign exchange was. More
\nshockingly, it was unable to track foreign exchange flows in and
\nout of the country, nor was it able to calculate the extent of
\nprivate companies' foreign debts.<\/p>\n
Only after speculative attacks on the rupiah escalated,
\nsetting off a feverish stampede of hard currency out of the
\ncountry, did Bank Indonesia begin taking stock of just how much
\nthe private sector really owed to foreign creditors. When the
\nfinal count was completed in mid-1998, the conclusion was a
\nshocking one: companies and banks owed a staggering total of more
\nthan $75 billion, mostly in short-term debts.<\/p>\n
The central bank was never able to estimate with any real
\naccuracy just how much capital flew out of Indonesia at the peak
\nof the currency crisis, this being in the first quarter of 1998
\nwhen the rupiah fell as low as Rp 17,000 to the dollar. Private
\nestimates put the capital flight at between $18 billion and $30
\nbillion.<\/p>\n
Commendably, the government, in spite of the devastating
\nimpact of the rupiah's free fall, did not resort to clamping
\ndown, as Malaysia did, by instituting forex control to cope with
\nthe panic. By drawing an important lesson from the situation, the
\ngovernment drafted a bill on reporting forex transactions which
\nwas enacted by the House of Representatives last April.<\/p>\n
Though the reporting system will impose additional work on
\nbanks it will not, however, cause excessive mountains of
\npaperwork, for only transactions worth over $10,000 will have to
\nbe accounted for in detail. Transactions valued up to $10,000 can
\nbe reported in a lump sum.<\/p>\n
Surely up-to-date reporting will provide the central bank with
\naccurate, comprehensive and timely data on forex deals, enabling
\nit to have a more comprehensive understanding of its external
\nbalance and international investment, a prerequisite for devising
\neffective monetary policies.<\/p>\n
The question now is what will make the new law more effective
\nthan similar regulations in the past. Since the early 1980s,
\nprivate companies, including banks, have also been required to
\nreport forex deals, notably foreign borrowings to Bank Indonesia;
\nbut the end result, apparent to all in late 1997, was that the
\ncentral bank remained completely in the dark about capital flows
\nin and out of the country.<\/p>\n
Surely the condition now is different under new regulatory
\nenvironment and exchange rate policy. The penalties stipulated in
\nthe law -- which range from fines amounting to Rp 100 million
\n($13,300) for nonreporting and Rp 5 million a day for any delay
\nin reporting, to suspension of business licenses for six
\nconsecutive months of nonreporting -- would go a long way in
\nforcing banks to make monthly reports. The free floating of the
\nrupiah makes the monitoring of forex flows an urgent necessity so
\nthat the central bank can conduct effective management of funds.<\/p>\n
Also most important is that different from the past when Bank
\nIndonesia was often made powerless in dealing with politically
\nwell-connected banks and companies, it is now vested with strong
\nautonomy by virtue of the new Central Bank Act enacted last May
\nand is therefore more powerful to enforce laws on monetary
\naffairs.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/tracking-capital-flows-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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