Clutching at straws

Among the proposals Indonesia has so far been toying with in its desperate effort to stabilize and strengthen the rupiah, the one made by business leader Aburizal Bakrie to President B.J. Habibie last Friday on the compulsory surrender of export earnings by exporters to the central bank is the most insensible. Its unfeasibility was matched only by the currency board arrangement with its fixed-rate system which then President Soeharto mulled over in February as a quick-fix solution to the beleaguered rupiah.

The business community and the government have understandably been frustrated by the persistent volatility of the rupiah at a rate now merely 20 percent as high as its value in July 1997. Much debate and analysis have been bandied back and forth on the main reasons behind the assault on the rupiah, yet most of the government programs now underway in cooperation with the International Monetary Fund offer only a gradual recovery, and with very tough requirements.

We could dismiss such a proposal simply as a publicity seeking gimmick if the need for reimposition of foreign exchange control was voiced by a politician who does not understand the complexity of the foreign currency market.

It was strange, though, that the proposition was touted by Aburizal, chairman of the Indonesian Chamber of Commerce and Industry (Kadin). He was right in contending that nothing else would happen if the rupiah remained highly volatile at such a low rate. But as a businessman and chairman of the widely diversified Bakrie Group, he should have realized that there is no quick fix to stabilizing or strengthening a currency rate.

The exchange rate of a currency is determined by the market which in turn is influenced by a complex web of economic and political factors. Market confidence is a precious commodity. Once lost, it is difficult to regain, especially because markets have long memories of a country that has been in trouble before.

We rest assured, though, that President B.J. Habibie immediately dismissed Aburizal's proposition, allowing no time for the market to speculate. Habibie instead asked the business leader to further debate it with experts or test its viability and market acceptability through a poll of opinion.

It is also quite encouraging to note that the central bank governor has always steadfastly turned down suggestions for any form of foreign exchange control, including the idea of a two- tier currency market, which was touted earlier by some currency analysts.

However it is defined, compulsory selling of export earnings to the central bank is a form of foreign exchange control which will destroy one of the few most valuable assets Indonesia now can still offer to foreign businesspeople or investors -- free foreign exchange or open capital account.

Indonesia's experiences in the late 1960s and early 1970s and those of other countries in Asia and Latin America which had once imposed foreign exchange control clearly testify to how such a system has never been effective in beefing up foreign reserves or strengthening a currency rate.

Foreign exchange control mostly failed in the 1970s and early 1980s, despite the fact international financial markets were not as sophisticated and globalized as they are today.

The biggest hurdle to any form of foreign exchange control is the ability of a government to implement it. It is surely doomed to fail under the management of our government, notorious as one of the most corrupt in the world. Moreover, exporters could simply under-invoice the prices of their exports to keep most of their hard-currency earnings overseas, or over-invoice the prices of their imports to transfer most of their dollars overseas. The government obviously would not have enough resources to inspect millions of foreign trade transactions to detect such practices.

It is therefore most imperative, especially now when even the government itself relies on foreign loans for almost 50 percent of its budget, that officials, businesspeople and analysts stop toying with so dangerous an idea of reimposing foreign exchange control.

Any form of foreign exchange control would not only kill our chance of getting new private capital inflow, but also scare away foreign and national investors within the country. Without private capital inflow, the rupiah will never stabilize or strengthen and our economy will never recover, however large the official loans the government secured every year.