BI will not move toward capital controls: Syahril

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin stressed on Friday that the central bank would not impose capital controls to stabilize the beleaguered rupiah.

Sjahril said the current central bank law prevented Bank Indonesia from taking such a step.

"We will never move toward capital controls. We'll continue to adopt the free foreign exchange system as has been formulated in the Bank Indonesia law," he said following Friday prayers at the central bank's headquarters.

"(The free foreign exchange system) will remain in effect," he added.

Sjahril was responding to fears that Bank Indonesia might move toward imposing capital controls following the issuance of a controversial foreign exchange ruling which limits rupiah- denominated transactions between onshore banks and nonresidents.

Some economists and politicians have in the past called on the central bank to adopt a capital control system similar to Malaysia's, and to force exporters to repatriate their dollar earnings to help stabilize the rupiah.

Sjahril said that Bank Indonesia would not expand the limitations on rupiah transactions beyond what was stipulated in the new ruling.

"There's no need to move further beyond the (new ruling). It's certain that we will not impose capital controls.

"The new limitations are already sufficient to help stabilize the exchange rate," he said.

Bank Indonesia announced the new ruling earlier this week, putting in place two substantial limitations: a ban on onshore banks from making certain rupiah transactions with nonresidents, including foreign individuals and institutions; and lowering the limit of forward transactions between local banks and nonresidents without an underlying investment transaction to US$3 million from $5 million.

Bank Indonesia has said that the new rules are aimed at helping curb speculation on the rupiah, which fell by more than 25 percent over the course of last year.

But Sjahril said that other factors, including domestic social and political uncertainties, also affected the exchange rate of the rupiah.

The rupiah strengthened slightly to Rp 9,445 against the US dollar late on Friday, up from Rp 9,470 on Thursday.

The new ruling caused initial confusion among currency dealers and foreign bankers, prompting the International Monetary Fund to call on Bank Indonesia to provide clarification. Foreign bankers met with Bank Indonesia officials on Wednesday.

According to reports, the new ruling has cut off a source of income for certain foreign banks that have been active in currency trading.

Meanwhile, Bank Indonesia Deputy Governor Miranda Goeltom was quoted by Reuters as saying at a gathering with foreign journalists on Friday that the central bank had no intention of imposing capital controls, and that the new ruling was aimed at stabilizing the rupiah.

Miranda made the following points about the new ruling: * Jakarta-based foreign banks are classified as residents; * Nonresidents investing in the local stock market have no cause for concern over the ruling; * Bank Indonesia will leave offshore rupiah deposits to market mechanisms; * It may take the market from one to two months to digest the new rules;

Separately, Minister of Finance Prijadi Praptosuhardjo welcomed the new foreign exchange ruling, saying he hoped it would help strengthen the battered rupiah.

Prijadi said on Friday the rupiah's current exchange rate did not reflect the true economic fundamentals of the country.

Speaking to journalists following a meeting with the House of Representatives budget committee, he said the rupiah should be stronger than its current level because the country's main economic indicators were positive.

The government projects the rupiah to be at an average rate of Rp 7,800 to the dollar this year.(rei)