Currency peg plan worth exploring, says IMF official

Currency peg plan worth exploring, says IMF official

SINGAPORE (Agencies): A senior official of the International Monetary Fund (IMF) said here yesterday that a proposal to peg the Indonesian rupiah to the U.S. dollar to ease volatility was "worth exploring."

Kunio Saito, director of the Asia-Pacific regional office of the International Monetary Fund (IMF), told journalists on the sidelines of a trade union conference here that stability should be the primary concern.

"I think it is an interesting proposal worth exploring, but it is important to explore all the pros and cons before finalizing the policy," he said.

"The most important thing at the moment is to stabilize the market and make sure that the markets remain stable. I think the option of this currency peg or currency board can be explored but the first thing is stabilization," he said.

Indonesian President Soeharto hinted Monday that Jakarta may adopt a currency board system under which the exchange rate is fixed at a certain level to be maintained using foreign reserves.

There is some skepticism in the market over whether a fixed rate can be maintained by Jakarta, which has only 20 billion dollars in reserves and nearly 140 billion dollars in foreign debt.

"The markets have been reacting positively to the reforms," he said, adding that "it is important to maintain temporary tight monetary policy to ensure rupiah assets are sufficiently attractive."

Saito said the markets "are responding and moving in the right direction" after the new reforms were unveiled

In a related development, Chase Securities commented in a research report in New York that the Indonesian government, which has watched its currency plunge since July, would be poorly served by adopting a currency board.

Chase analysts wrote this medicine would not fit Indonesia's ailments.

"It is not evident that the Indonesian economy would be best served by a rigidly pegged exchange rate," said Chase analysts Karen Parker and John Normand. "This particular option would not be appropriate to Indonesia's circumstances and looks unlikely to be adopted."

The rupiah followed a steady downward crawl against the U.S. dollar from 1987 to 1997, prompting steady growth of non- traditional Indonesian exports, the Chase report said.

"Without this flexibility, the adjustment of real wages and employment to terms of trade shocks would have been quite painful," Chase said.

Chase pointed out that an adoption of a currency board would "restrict" the authorities' room for fiscal discipline.

Many Indonesian banks would be unable to bear the financial pressures accompanied by a rigid currency board, a fact "that would be amply clear to market participants, undermining the credibility of such an arrangement at the outset," Chase said.

The Chase analysts acknowledged that stabilizing the currency is the first step to help Indonesia's ailing banking system, but said a currency board was not the only means toward that end.

"A resolution of the current political uncertainty and steady implementation of the (International Monetary Fund's) adjustment program, as has been done in Thailand and South Korea, would go a long way toward restoring confidence," the Chase analysts added.