Central bank claims on-site inspections helping rupiah

Central bank claims on-site inspections helping rupiah

JAKARTA (JP): Bank Indonesia (BI) acting governor Anwar
Nasution said on Wednesday the central bank's recent move to send
its inspectors to foreign exchange banks operating in the country
had been effective in helping to stabilize the rupiah.

Anwar reiterated that the on-site inspections were aimed only
at ensuring that the banks abided by the existing prudential
rulings.

"The rupiah has (gradually) strengthened," he told reporters
on the sidelines of a seminar.

Bank Indonesia recently sent its inspectors to dealing rooms
of foreign exchange banks in Jakarta after the rupiah tumbled to
a 21-month low of 9,570 per U.S. dollar amid continuing political
uncertainty.

Bank Indonesia officials have said that the central bank would
continue surprise inspections to ensure that the banks abide by
the existing rulings, including a prohibition of surpassing the
20 percent daily net open position limit, and from opening
forward dollar contracts worth more than US$5 million with
nonresidents.

The rupiah has been relatively stable in the past few days and
ended stronger at 8,870 per dollar in late trading on Wednesday,
compared to 8,953 on Tuesday.

Anwar also recently visited Singapore to ask for assistance to
help curb speculation on the rupiah.

But he said that the assistance from Singapore would only be
in the form of information and technology.

Anwar reiterated that Bank Indonesia would remain committed to
maintaining the current free floating foreign exchange system.

"We believe in the market system, but we want a market system
that is in order," he said.

Separately, Bank Indonesia deputy governor Achjar Iljas said
on Wednesday that Indonesia was not in a good enough condition to
implement a currency board system (CBS).

Achjar told a weekly news gathering that the country's foreign
exchange reserves were simply not sufficient and the condition of
the banking system was not strong enough to support a CBS.

"Looking at the current condition, I don't think we should
experiment with the CBS system," Anwar said.

Under the CBS system, the rupiah would be pegged to a certain
hard currency, like the U.S. dollar, at a particular rate.

Achjar said that with the limited amount of forex reserves,
the CBS system could be easily tested by the market.

He also cautioned that under the CBS system, banks suffering a
funding mismatch could not seek credit from the central bank as
the lender of last resort.

One of the key elements of an amendment to the 1945
Constitution being finalized by the People's Consultative
Assembly is an option between maintaining the current central
bank or creating a completely new monetary authority.

Informed sources said that creating a new monetary authority
would pave the way for implementing the CBS system because under
such a system there would no longer be a need for the central
bank.

The previous government of president Soeharto failed in its
attempt to implement the CBS system in early 1998 due to strong
opposition from the International Monetary Fund. (rei/bkm)