Forex control, who needs it?

The administration of President Abdurrahman Wahid seems to have mastered the art of blaming everything that goes wrong in this country on anything but itself. The weakening of the rupiah these past two months is the latest example of that nagging habit.

The currency has lost 14 percent in value in the last six weeks, severely undermining the government's economic programs. The fall, to a level of around Rp 8,400-8,500 last week, has completely undermined the government's budget calculations which are based on a rupiah value of Rp 7,000.

The government has laid the blame on the business community, currency traders and speculators. With that in mind, the Cabinet has been toying with the idea of imposing some form of foreign exchange controls, or capital controls. But by deceiving itself on the real cause of the weakening currency, the government has focussed on treating the symptoms, not the illness.

Several Cabinet ministers have come out in favor of capital controls, mooting the idea to generate public support. The plan has apparently been discussed at Cabinet meetings, indicating that the government was seriously considering it.

Typically, and not unexpectedly, the idea was quashed the moment the International Monetary Fund (IMF) managing director Horst Koehler arrived in Jakarta this week, providing more fuel for future anti-IMF sentiments should the economy fail to pick up. We will probably never know Koehler's precise words when he met the President on Monday. But after the meeting, the President completely ruled out the idea, something which he could have done days ago and spared the nation from engaging in wasteful debate.

While the matter of capital control has been put to rest, at least for now, for what it is worth, the controversy has provided the nation with a valuable academic exercise. Hopefully, it has given some insight to the government as to what course of action it should take to restore the rupiah's value.

More than any other force, the rupiah's fall in recent weeks must be attributed to a general decline in confidence in the economy. This lack of confidence is also shown towards the government.

The continuing violence in many parts of Indonesia, old and new scandals in the government, uncertainties about the future of the Abdurrahman's administration in the run up to August's meeting of the People's Consultative Assembly, and many other concerns have contributed to this political instability.

The fact that the monthly inflow of foreign currencies has been below the export figures means that most export revenues have been stashed in offshore banks. Wary of the political situation in Indonesia, many exporters are playing it safe by keeping their money abroad.

It is likely that no amount of foreign exchange or capital control would prevent the rupiah from sliding given the current situation. Nor would it be able to shore up the rupiah on a sustainable basis. The strengthening of the rupiah towards the end of last week was spurious, fanned by rumors of impending capital control. It may have momentarily increased the rupiah's value, but in the medium and long run, the rupiah will adjust more to the country's political outlook and economic fundamentals than to daily market rumors.

Foreign exchange controls, or capital controls, have merits in certain cases, and they have been applied successfully in other countries. Malaysia is a case in point, and because of its proximity, many officials and analysts feel that the policy could be adopted in Indonesia with equal chances for success.

The chief objection to foreign exchange or capital control is that it distorts the market, that it will likely keep the currency overvalued, exposing it to even more speculative attacks. Such controls are only effective as temporary measures, as in Malaysia.

A free foreign exchange regime remains a major incentive for foreign investment. Reversing the policy will only undermine the government's own drive to bring investors back to Indonesia.

The biggest concern about imposition of foreign exchange controls in Indonesia is the fear of handing over more controls than necessary to our inept and corrupt bureaucracy. For all the talk about establishing a clean government, this administration is far from ready to assume more power than it has today.

Any talk of establishing currency or capital controls, if they are indeed desirous for Indonesia, clearly must wait for the arrival of a cleaner and more professional bureaucracy. This then becomes a moot point. For, with a clean and competent government, we would probably never be in this mess in the first place.