BI warns government of pushing state banks to support rupiah

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin warned the government on Friday not to force state banks to use their reserves to support the ailing rupiah.

Sjahril said that the call for the state banks to intervene by selling their dollars should take into account the "condition" of each bank.

"It's only an appeal, it depends on the condition of each bank. They must not be forced. If they're able to, then do it, but if not, don't," he told reporters.

Sjahril was asked to comment on a call by President Abdurrahman Wahid earlier this week for the state banks to sell their dollars to support the rupiah.

Several analysts fear that this kind of foreign exchange speculation activity could send the state banks into the red again, as experienced in 1997 by Bank Ekspor Impor Indonesia (Bank Eksim) which suffered millions of dollars in losses from forex transactions.

Bank Ekspor Impor was merged into the newly created Bank Mandiri to bail out the bank, and cost the state budget dearly.

Meanwhile, the rupiah closed higher again on Friday, at Rp 8,338 per U.S. dollar in Jakarta trading, compared to Rp 8,350 on Wednesday. Thursday was a public holiday.

Dealers said that state banks intervened in the thin volume currency market.

The rupiah has started to gain most its lost ground since Wednesday.

The local unit has been badly hit over the past couple of weeks due to a combination of external factors and domestic political and economic uncertainty.

The rupiah reached its lowest level of Rp 8,700 last week amid reports of friction in the Cabinet. But its closing level was still below Rp 8,500.

Traders also said that the signing of the country's new letter of intent to the International Monetary Fund (IMF) on Wednesday provided a positive impact on the development of the exchange rate of the rupiah against the dollar as this showed the government's commitment to economic reform programs.

Sjahril also said that the central bank had no plans to continue with its market intervention measure to strengthen the rupiah.

"We will only intervene when needed, but if not we won't," he said.

He said that Bank Indonesia had only sold about $300 million this week to support the rupiah.

He said that this was a small amount compared to the country's forex reserves of about $29 billion.

Abdurrahman also called on the supposedly independent central bank earlier this week to take stronger action to support the rupiah, either by boosting domestic interest rates or through market intervention.

Sjahril said that it was difficult to forecast the course of the rupiah because market sentiment was now more dominant in dictating the direction of the exchange rate.

"It will take time to strengthen the rupiah; it must be done gradually and it really depends on the market sentiment," he said.(rei)