Forex policy not merely for exports

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono said yesterday that the central bank would not pursue a foreign exchange policy to merely boost exports.

Soedradjad said that allowing the rupiah to depreciate faster against the U.S. dollar was not the only way to improve the competitiveness of the country's exports. He said the rupiah exchange rate would be managed so the value of the currency would neither be too high nor too low.

"We want to be as realistic as possible but we also don't want to be blamed by exporters," he told approximately 900 executives and financial analysts at a seminar on Indonesia's capital market development.

The central bank governor agreed that allowing the rupiah to depreciate faster against the dollar was one of the government's policies to stimulate exports.

However, he said, the monetary authority would not sacrifice market principles only to ensure that exports were on right track.

"If we allow the rupiah to depreciate much faster, while there is a glut of dollars in the market, you will all laugh at us because such a kind of policy is against the market mechanism," he said when asked if he shared Minister of Finance Mar'ie Muhammad's view that the rupiah had been slightly overvalued.

Mar'ie, who officially opened yesterday's conference, said in his address that he thought the rupiah had of been slightly overvalued lately and that the currency should be depreciated faster against the American greenback to improve the competitiveness of the country's exports.

The central bank governor said he would not comment on Mar'ie's observations, but he said that over the past three years the central bank had done exactly what the minister of finance had said.

According to the central bank governor, the rupiah depreciated 3.2 percent against the U.S. dollar in 1993, 4 percent in 1994 and 4.5 percent in 1995 in line with the government's policy to stimulate exports. In the January to July period this year, the rupiah depreciated nearly two percent, less than a half of the government's 5 percent target for the year.

"Depreciation as a way to improve the competitiveness of exports is valid and justified," he said. "Such a policy is to supplement the export drive. Exports should not, therefore rely mainly on the exchange rates."

The central bank acknowledged that on a daily basis, the rupiah was often too strong. But he warned that exporters should not base their judgments on short-term performances because the country's monetary policy was based on a long-term prospects.

"The exporters should be blamed if they make judgments on a daily basis because we are talking about prospects and the assessments should be at least on a medium-term basis," he said.

Soedradjad said other countries' experience told us that the depreciation of their currencies did not help them promote their exports.

He said the U.S. dollar had depreciated against the Japanese yen much faster in the last two years but it did not really help U.S. exports.

On Thailand's experience the governor said: "Thailand has hardly changed its currency rate over the last several years. But who can argue with me that Thai products are not competitive."

He said the current policy to depreciate the rupiah against the dollar at the previous annual rates of 4 percent to 5 percent was not sufficient to stimulate exports.

The central bank has a much better mechanism at present in managing the rate of the rupiah against the dollar. In the past, the rupiah rate was set every day at eight o'clock in the morning based on a basket of major foreign currencies, he said.

"Now the central bank can change the rate any time when it feels necessary. It could be changed in hours," he said. "At present, we don't change it if we don't have to change it. We will change it if we have to change it."

Participants at the seminar asked the central bank governor about the government's policies on curbing the country's widening current account deficit.

Soedradjad said that raising export earnings remained the first priority, followed by wooing more direct investment and portfolio capital.

He said the exports would be bolstered through a more efficient manufacturing sector.

He confirmed that the central bank's move last month to float bonds on the New York Stock Exchange was mainly aimed at setting a benchmark for Indonesian private borrowings, which have often had higher interest rates than those raised by private companies from other developing countries. (hen)

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