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)