Countering speculators

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