CBS critical for RI survival: Hanke

JAKARTA (JP): President Soeharto's currency board advisor Steve Hanke warned yesterday that Indonesia's economy would collapse within four months if the government did not introduce a fixed exchange rate regime as soon as possible.

Sjahril Sabirin, the new governor of Bank Indonesia, however, reasserted yesterday the government was still studying the fixed exchange rate system and that there was no date set for its introduction.

"We are always in consultation with the International Monetary Fund," Sjahril said after his installation by Soeharto at the State Palace yesterday morning.

Sjahril said the rupiah rate against the U.S. dollar, which closed at 8,900 yesterday, was too low and was debilitating to the country's economic development.

Hanke, an American economist from John's Hopkins University, contended that speed was the essence for the CBS plan, warning that the country's economy could be dead within four months.

CBS is a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.

Sjahril, 54, formerly a managing director at Bank Indonesia, the central bank, replaced Soedradjad Djiwandono who was honorably dismissed on Feb. 11, two weeks before his tenure was supposed to end.

Hanke talked to reporters yesterday morning after he emerged from a meeting with Soeharto at the President's Jalan Cendana residence.

According to Hanke, he and the President also discussed the technical details of the currency board plan at the Cendana residence Wednesday evening.

Indonesia's sudden move on a currency board system (CBS) has drawn international opposition from the International Monetary Fund (IMF), members of the Group of Seven (G-7) top industrial countries and the European Union.

Warning

IMF managing director Michel Camdessus has warned that the IMF might discontinue its US$43 billion rescue program for Indonesia if the government pushes ahead with its fixed exchange rate scheme at this point in time.

"You should do it as soon as possible," Hanke said in reply to a question as to whether Indonesia should wait for four months as suggested by the IMF.

"Well, I did stress this morning (to Soeharto) that the speed of action is important. But as to the question on when CBS would be introduced, you should ask that to the President and the legislators," he added.

But he warned that "within four months, your economy would be dead because there is nothing to do."

Hanke was appointed early this month to the President's Economic and Monetary Resilience Council, which is in charge of overseeing the implementation of the IMF-arranged reform package. Indonesia agreed to the package on Jan. 15 as a condition to the US$43 billion bailout program it arranged with the IMF and other multilateral institutions and governments.

Hanke said he did not see any other alternative for Indonesia other than introducing a CBS as soon as possible.

Hanke further reiterated his argument that without a stable currency, which was possible now only under a CBS, Indonesia would not be able to implement the reform measures.

He said he has discussed the CBS plan with the IMF team here and has asked them to clarify why they believed Indonesia was not ready to adopt a fixed rate system at this time.

Camdessus said in Moscow yesterday he hoped Indonesia's economic situation would quickly normalize.

"I hope we will stabilize Indonesia soon but nobody knows if this will happen again in another place," he was quoted by Reuters as saying at a briefing.

The U.S., however, reiterated its opposition to Indonesia's CBS plan yesterday, arguing that the IMF rescue program should be the top priority for Indonesia at this moment.

The U.S. State Department on Wednesday urged President Soeharto to stick to economic reforms prescribed by the International Monetary Fund, warning that a proposed currency board was too risky now.

"Both the IMF and G-7 states have expressed some concern about the risks involved in moving ahead with the currency board in the current context," State Department spokesman James Foley told reporters.

"We believe that Indonesia needs to continue to work closely with the IMF, to listen to the IMF, and that's really the critical element in restoring economic health in Indonesia," he added.

"We regard Indonesia as a nation of critical importance in the region and beyond," Foley said. "And we believe we have not only significant economic, but also security interests in a stable, prosperous Indonesia."

In Singapore, United States Commerce Secretary William Daley also reaffirmed yesterday his government's stance that Indonesia must implement the economic reforms prescribed by the IMF to get its ailing economy back on track. (prb)