Clutching at straws
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.