Will Indonesia adopt a fixed-rate system?<\/p>\n
The current lead of the Indonesian Democratic Party of
\nStruggle (PDI Perjuangan) in collecting electoral votes has
\nraised questions whether the coming government will adopt a
\nfixed-rate foreign exchange system. Economist Kwik Kian Gie, who
\nis also deputy chairman of the party, is trying to explain his
\nposition on the foreign exchange issue.<\/p>\n
JAKARTA (JP): Several parties among domestic and international
\nsocieties have reacted unfavorably toward my long proposal for
\nIndonesia to readopt a fixed-rate foreign exchange system in a
\nbid to revive economic activities.<\/p>\n
Questions related to that proposal were raised particularly
\nafter media reports on a seminar organized by the Strategic
\nIntelligence on April 8, 1999, and it gave an impression that I
\nwas strongly insisting on the proposal in spite of the opposition
\nfrom the International Monetary Fund (IMF), with which the
\nIndonesian government has signed a bailout agreement involving
\naid worth more than US$40 billion. The proposal, therefore, needs
\nfurther explanation for clarification.<\/p>\n
After the start of the Indonesian economic crisis in the
\nmiddle of 1997, the rupiah's value depreciated sharply to its
\nlowest level of Rp 17,000 per U.S. dollar in 1998 before rising
\nback to about Rp 7,800 at present. The sharp depreciation has now
\ncaused the prices of industrial products, whose production
\ndepends heavily on imports, to rise by 2.5 or 2.8 times.
\nMeanwhile, affected by a lower purchasing power, most of
\nIndonesian society is unable to buy such products and many
\nfactories were forced to stop operations for about two years.<\/p>\n
The recovery of the rupiah's value has been partly caused by
\nthe implementation of IMF-approved economic policies, under which
\nsome economic infrastructures were readjusted. But the current
\nvalue of the dollar is still too high for the reinvigoration of
\nbusiness activities.<\/p>\n
Now that all economic indicators have shown a bottoming out of
\nthe economy, and while social and political conditions are
\napproaching stability, it is high time for the reimposition of a
\nfixed-rate foreign exchange system with the rupiah's conversion
\nrate set on the basis of the current purchasing power parity.<\/p>\n
I know that the reimposition of the system may distort the
\nmechanism of the foreign exchange market. But the current
\nconditions can be used as momentum to "force" the dollar's value
\nto decline to a level that can support the reinvigoration of
\nbusiness activities. The level of the rupiah's value, however,
\nmust be determined after careful calculation to avoid being
\novervalued. At the same time, the economic infrastructures should
\nbe mended to support the stability of the rupiah's value at that
\nlevel.<\/p>\n
I fully understand that the proposed fixed-rate system cannot
\nbe reimplemented without the consent of the IMF, the World Bank
\nand the Asian Development Bank (ADB). I, therefore, will not
\ninsist on the readoption of the system in confrontation with the
\nIMF, by saying, "Go to hell" to the fund. But what I mean is that
\nwe have to continuously struggle for it, for the revival of many
\nindustrial facilities, at discussions held with the IMF every
\nthree months to review the progress of Indonesia's program on
\neconomic recovery.<\/p>\n
Without getting approval from the IMF, we will never have any
\nfunds for the financing of economic activities because the
\ngovernment, due to the serious economic deterioration, will never
\nbe able to generate adequate revenue for routine programs,
\nincluding the payment of salaries to civil servants and members
\nof the national Military (TNI). Without IMF's consent, Indonesia
\nwill also find difficulties in generating bilateral loans from
\ndonor countries under bilateral arrangements, such as Singapore
\nand Japan under the Miyazawa Plan.<\/p>\n
For those who do not agree with the refixing of the rupiah's
\nvalue, they should also understand that the IMF's theory -- that
\nthe rupiah's value will improve soon after the economic
\ninfrastructures are restructured -- proves to be moving too
\nslowly.<\/p>\n
But it should be understood that the proposed fixed-rate
\nsystem is different from a currency board system (CBS), which was
\nproposed for implementation in Indonesia in early 1998. The
\nproposed system was actually implemented in Indonesia for 25
\nyears before the introduction of a managed float system with an
\nintervention band.<\/p>\n
The proposed fixed-rate system is also not meant to be
\nimplemented permanently. As soon as the rupiah's conversion rate
\nis stable, supported by economic and political stability, the
\ncurrency exchange system can be set free again and be allowed to
\ndevelop freely in line with the market mechanism.<\/p>\n
I acknowledge that the reimposition of the fixed-rate system
\nmay have a risk; there would be a rush on dollars. But the
\ncurrent free exchange rate system has produced a real risk -- the
\ncessation of many industrial factories.<\/p>\n
So, we have to be realistic in trying to reduce the economic
\nburdens of people and I will not strongly insist on my proposal
\nbut I do hope that the post-elections government will have a high
\nsense of dignity to work hard so that the country's economy will
\nno longer depend so comprehensively and so heavily on foreign
\nparties.<\/p>\n
Once I said at a seminar that we prefer to be controlled by
\nforeigners who can cooperate and be influenced rather than being
\ncontrolled by Indonesian economic criminals. But above all, we
\nprefer to be controlled by Indonesian citizens who uphold
\nmorality and abide by the rules.<\/p>\n
Many small and medium companies, which manage businesses
\nconservatively by keeping debt-equity ratios low, have proven
\nstrength against the current economic crisis because they avoid
\nbeing dependent on facilities provided by the government through
\ncorrupt, collusive and nepotistic practices.<\/p>",
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