Countering speculators

The planned measures to hit back at currency speculators have now been revealed. Finance minister Mar'ie Muhammad announced on Wednesday that the government was preparing to set up a currency board system (CBS). Earlier, President Soeharto had said that the rupiah will be pegged to a certain dollar exchange rate, with the aim of stabilizing the nation's currency.

How could a CBS help to restore our economy? In such a system the rupiah is linked to an anchor currency at a fixed rate of exchange. A prudent choice of exchange rate is essential. If set too low, local business will be unable to expand. If set too high, our exports will become uncompetitive.

Of concern is the demand for dollars at the new fixed rate of exchange. People may try to buy large supplies of the anchor currency at the new exchange rate. The government must therefore possess sufficient funds to meet this demand, or it will be unable to guarantee the new exchange rate.

Observers believe that this problem can be overcome. Hong Kong had considerably smaller foreign exchange reserves when it introduced a currency board system in 1983. Nevertheless, Hong Kong was able to maintain its currency at a fixed rate against the U.S. dollar.

We must try to emulate Hong Kong, which successfully introduced a currency board system, rather than Argentina, Estonia or Lithuania, where the system was less successful. Problems in the latter countries are thought to have stemmed from a poorly managed and overly protected banking system. We are therefore pleased that the government is continuously striving to improve our banking system.

The government's plan to install a currency board system has already brought a salutary effect. The rupiah has been steadily strengthening, though not to the July 1997 pre-crisis level of Rp 2,400 to the dollar. With a fixed exchange rate, the corporate sector debt burden will be reduced and the price of basic commodities stabilized. Improved security resulting from this would be reassuring in the run up to the General Session of the People's Consultative Assembly (MPR). It is hard to imagine what might happen if the IMF and the World Bank fail to support this program.

-- Bisnis Indonesia, Jakarta