CBS application requires great care

CBS application requires great care

I fully agree with Emil Salim, who has said that a currency
board system (CBS) must be applied with great care and not rushed
hastily into operation.

In considering any such system, we must remember the agreement
that we have entered into with the International Monetary Fund
(IMF), which obliges us to institute economic reform in
accordance with the 50 points detailed in a letter of intent
signed by President Soeharto. Approval from the IMF must be
obtained prior to any introduction of a CBS. Otherwise, we will
be in breach of our commitments and in danger of provoking the
IMF to sanction us through postponement, or even cancellation, of
the US$43 billion aid package pledged to support us. So far, only
$3 billion of this sum has been disbursed.

We must also ask if our foreign exchange reserves, estimated
to be $19 billion, are large enough to match the total value of
rupiah in circulation? Total rupiah currently in circulation is
estimated to be Rp 350 trillion. To hold the rupiah at an
exchange rate of Rp 5,000 to the U.S. dollar, $70 billion in
foreign exchange is required.

If only $19 billion is available to back rupiah in
circulation, then only Rp 95 trillion ($ 19 billion x Rp
5,000/US$1) will have the dollar backing required under a CBS.
What will then happen if there is a rush for U.S. dollars at an
exchange rate of Rp 5,000? Surely our foreign exchange reserves
will be used up in a short time.

Estimates suggest that 25 percent of rupiah are in the hands
of overseas speculators. This vast reserve of currency could used
in attempts to disrupt the exchange rate after it has been set at
a fixed rate to the U.S. dollar.

Furthermore, our banks are not yet in sound condition.
Introduction of a CBS will not allow the central bank to help
banks with liquidity problems. Consequently, interest rates will
soar and domestic business will remain stagnated.

There is a danger that, if a CBS is introduced without
adequate foreign exchange to back all the money in circulation, a
black market for currency will develop, offering exchange rates
other than those fixed by the government.

CBS needs, as a prerequisite, a clean, strong, respected,
commanding, trustworthy and popularly supported government.
Discriminating practices, such as demonstrating favoritism to the
families of high-ranking government officials, will be taboo.
Corruption, collusion and nepotism must be banished off once and
for all. The problem is whether or not, considering the present
circumstances, it is possible for such a government to exist in
Indonesia.

Finally, even if a CBS is adopted, who will guarantee that
private companies will be able to repay their huge foreign debts?
The government?

SUHARSONO HADIKUSUMO

Jakarta