BI governor reaffirms free forex policy

JAKARTA (JP): Bank Indonesia (BI) Governor Sjahril Sabirin reiterated on Thursday that the country would not copy Malaysia's move last week imposing foreign exchange controls.

Sjahril said Indonesia had already had an experience with capital controls in the past and believed them to be ineffective.

"We've already had that experience before and it didn't work well," he told reporters following a hearing with the House of Representatives on a new government-proposed banking bill.

Malaysia surprised the region's financial community last week when it imposed capital controls in an effort to stabilize the ringgit by effectively pulling the currency out of international circulation and fixing its exchange rate at 3.80 to the U.S. dollar.

Despite statements made by senior economic ministers dismissing rumors that Indonesia would follow in Malaysia's steps, many market players have been speculating that Jakarta would opt for some sort of capital control system.

Indonesia imposed a capital control system in the late 1960s and early 1970s, a move that created a black market for foreign currency and rampant currency smuggling.

Some economists have warned President B.J. Habibie's administration not to copy Malaysia's new system because of Indonesia's weak bureaucracy which is prone to corruption. They have added that such a move would discourage foreign investment badly needed by the country to kickstart an economic recovery.

Implementing a capital control could also put Indonesia in a confrontation with the International Monetary Fund, which is providing a multibillion bailout package to the country.

Habibie is planning to visit Kuala Lumpur next month to discuss political, economic and international issues with his counterpart, Prime Minister Mahathir Muhammad.

Foreign exchange control proponents, however, have said that a capital control system would allow Indonesia to lower its sky- high interest rates which were raised to support the rupiah.

A looser monetary policy would then help restore financing for the real sector, they have argued.

The rupiah, which had been hovering over the 13,000 level to the U.S. dollar for months, strengthened to about 10,800 last week before slipping back to the 12,000 level this week in the wake of widespread demonstrations against Habibie.

The rupiah inched its way to 11,700 against the dollar on Thursday.

Sjahril said on Thursday that the rupiah's strengthening was partly due to improved market sentiment from players who believed the political fallout in the wake of this week's demonstrations was exaggerated.

He also said that the central bank's release of between $5 million and $15 million per day to the spot market partly helped strengthen the local currency.

"But these weren't interventions. We're just supplying money for export and import needs," he said.

He explained that the foreign currency was part of the international bailout funds provided to Indonesia. (rei)