Accountability in the CBS issue
Accountability in the CBS issue
By Frans Seda
JAKARTA (JP): Currency board systems may share the same
acronym with confidence building systems, but the two are
nevertheless distinct entities. They do however fall upon each
other in the current economic crisis.
Contemplating introducing a currency board system to cure
current woes and the problems which this entails has once again
revealed that the fundamental problem in the Indonesian economy
is a lack of confidence.
In the four months from Oct. 1997 to Feb. 1998 the economy has
twice stumbled due to a lack of confidence.
In October we requested IMF aid, drew up and agreed to a set
program of reforms and received a down-payment of US$ 3 billion
from the aid package agreed between the Indonesian authorities
and the IMF. We then spent this money attempting to defend a
weakening rupiah.
Following this, a series of events demonstrated that Indonesia
lacked commitment to reforms and conditions agreed with the IMF.
Indonesia then made efforts to obtain bilateral funds, but all
countries solicited would only contribute assistance under the
aegis of the IMF.
Our intention to plough our own furrow was also evident in the
1998/99 draft state budget, which was prepared without consulting
the IMF. As a result the rupiah continued to weaken and the
potential of the first IMF intervention to right the economy was
wasted.
Then the government turned to the IMF again when, on Jan. 15,
the President signed a letter of intent, in which the government
undertook to revise the state budget and implement 50 points of
economic reform. The budget, which had already been put before
the House of Representatives on Jan. 6, would be revised to bring
it into line with forecasts used in the IMF bail-out package.
However, public confidence had not been fully restored. This
was evident from the sharp drop in the rupiah exchange rate
against the U.S. dollar, even after the letter of intent had been
signed.
The political and economic necessity of stabilizing exchange
rates brought the idea of a currency board system (CBS) to the
forefront of discussion on solutions to the crisis. The IMF
reaction to this proposal suggested that, for the second time,
Indonesia was going back on a bargain it had struck in return for
assistance. The IMF had not been consulted over the possible
introduction of a CBS.
Irrespective of the efficacy of a CBS, trustworthiness, and
the confidence this generates, has twice blighted our working
relationship with the IMF over the last four months. The second
breach of trust is worse than the first.
I have often been asked what alternatives there are to a CBS.
If it is only a restoration of confidence that will rekindle our
economy, then there is no alternative.
The rupiah gained in strength when the government announced
its intentions regarding the CBS. This was interpreted as a sign
of tacit market approval of the proposal.
However, I am surprised that Soeharto's officials and
ministers have failed to see that they have twice made the same
mistake in their working relationship with the IMF. This time,
premature discussion of a CBS has undermined confidence building
efforts and the rupiah is once again weakening.
Discussions of a CBS have not been held in a way which is
likely to instill confidence. Therefore, I believe that
introduction of the system may temporarily strengthen the rupiah
but will not arrest its downward slide in the long-run,
particularly if announced now for introduction at a later date,
as proposed by businessman Peter Gontha in a recent newspaper
article.
Precedents of the government reneging on commitments during
the last four months will leave markets unsure about whether or
not the government will stick to its guns and introduce a CBS.
Besides, people still do not know the precise details of any CBS
which may or may not be introduced in Indonesia.
A CBS requires our rupiah to be set at a fixed rate of
exchange to an anchor currency. To be operational, the system
must meet four requirements.
Money in circulation must be backed up by its equal value at
the fixed exchange rate in foreign currency equivalent. The size
of reserves required for this are estimated to be approximately
US$ 65 billion. The government is currently estimated to hold
foreign exchange reserves at $ 20 billion, leaving a shortfall of
$45 billion.
Strict compliance with the law must be guaranteed to
successfully implement a CBS. No power can be above the law.
The system must be transparent. All arrangements, regulation
and conduct must be explicable and open to scrutiny.
Finally, there can be no political intervention from any
party. Once appointed, the board of directors will have full
autonomy and will only be accountable to the public interest, the
law and their own conscience.
Given experience to date, it is unlikely that these
requirements can become reality. To do so requires a change in
the culture of governance in this country. This is not
impossible, but will take time.
However, if we can meet the requirements necessary for a
successful CBS, then our country and economy will be
substantially strengthened and the need to introduce a CBS
negated.
A CBS will reduce the role of monetary policy to maintaining
stability and convertibility at the fixed exchange rate. All
monetary policy, such as regulating the money in circulation,
loans and interest rates will be subjugated to the CBS.
Domestic circulation of money will depend on foreign exchange
stocks. Development policies, economic growth, equity and
creating employment opportunities have to play second fiddle to
defending the rate of exchange.
A CBS system is more restrictive than the changes proposed by
the IMF. Under changes proposed by the IMF, the government
retains the ability to use monetary policy to support
development, growth, equity and create employment opportunities.
In a CBS, the emphasis is entirely focused on stabilizing the
exchange rate.
So, in my opinion, it would be better for the time being to
concentrate on consistently implementing the letter of intent
that we presented to the IMF. Banking reforms could be speeded
up.
If this article gives the impression that I coute que coute
defend the IMF, let me explain that the crux of the matter is
accountability. The IMF is an institute with which we have
cooperated for over 30 years, from the earliest days of the New
Order. Every year they supply aid through the medium of the
Consultative Group for Indonesia (formerly Inter-Governmental
Group on Indonesia). In the 1998/99 draft state budget, the
Consultative Group on Indonesia contributed $6.5 billion.
In my own experience of dealing with the IMF and World Bank,
I have found that so long as Indonesia approaches them with clear
programs and reasonable demands, they are flexible in their
disbursement of assistance, and are willing, even pleased, to
follow initiatives proposed by the recipient country.
Since confidence is critical to restoring growth to our
economy, political reform is closely linked to the success of
economic reform.
The General Session of the People's Consultative Assembly in
March is an opportunity for us to launch political reform. No
matter how wide-sweeping our economic reforms are, confidence
will not return so long as the political system remain opaque.
Greatest benefit will result if the two sets of reforms take
place simultaneously.
Once confidence has been restored, we can begin to rise out of
the recession and consign the crisis to history. The economy will
begin to grow and only then will the question of a CBS for
Indonesia become relevant.
The writer, a former cabinet minister, now a businessman and a
noted political and economic observer based in Jakarta. The above
article first appeared in Kompas daily.
Window A: However, I am surprised that Soeharto's officials and
ministers have failed to see that they have twice made the same
mistake in their working relationship with the IMF.
Window B: So, in my opinion, it would be better for the time being to
concentrate on consistently implementing the letter of intent
that we presented to the IMF.