Forex restriction

We can expect an eased monetary measure within the next few days after the central bank imposed some restrictions on forward foreign exchange selling against the rupiah. The ruling, effective as from Saturday but was announced to the mass media only yesterday, limits forward forex transactions from domestic banks to non-resident (foreign) customers with the maximum transaction limited to US$5 million per customer and per bank.

The monetary authorities seems to be afraid of a new wave of speculative attacks on the rupiah once the tight monetary measure imposed on Aug. 19 is relaxed. But since the money squeeze is worsening the business uncertainty and increasing the risk of leading the whole economy into recession and even stagflation, the central bank should act soon to start gradual easing of the credit crunch. The restrictions on forward forex transactions could act as a deterrent to a new about of fierce currency speculation once the tight monetary measure is eased.

Even cabinet ministers have joined businesspeople and analysts in expressing great concern at the havoc wreaked on our economy by the wildly fluctuating rupiah and the attendant money squeeze. They were afraid the monetary authorities had overshot their tight monetary measure. State Minister for Investment Promotion Sanyoto Sastrowardoyo, speaking Friday after a meeting with President Soeharto, said he was extremely disturbed by the present uncertainty as it was obstructing investment activities.

Coordinating Minister for Political and Security Affairs Soesilo Soedarman had voiced similar alarm on Thursday. While he said that he fully realized and supported the objective of the credit crunch, Soesilo cautioned that too much of such a drastic measure could drive many small and medium-scale businesses into bankruptcy. As the minister in charge of overseeing political stability, Soesilo clearly foresees the threat of political instability that could be a side effect of the monetary shock therapy.

It is now almost three weeks since the nation's economy was thrown into the turbulent sea of a violently fluctuating currency following the floating of the rupiah on Aug. 14, and two weeks after much liquidity, the economic lifeblood, was squeezed out. Nobody knows how long these tough tactics should be applied, especially as the rupiah has yet to settle at a fairly stable trading range.

We can count ourselves fortunate, though, that the market remains fully stocked with basic daily necessities and their prices have not spiraled along with the rupiah. Theoretically, there is no reason for prices of basic food commodities (except wheat flour which is entirely imported) to rise steeply as long as stocks are adequate and their distribution is smooth. But this stability in the food sector could eventually be undermined. Members of the public, with ebbing confidence in the economy, may start panic hoarding if the current business uncertainty persists much longer.

Many analysts said the rupiah's decline last week was no longer driven by internal factors, but instead blamed the steady depreciation on the impact of the regional contagion as the ringgit came under fierce speculative attacks. This argument was puzzling to us.

Contagion effects are supposed to trigger only short-lived selling pressures by undiscriminating investors with herding behavior. Regional spillovers should have been transitory in the absence of significant changes in economic fundamentals.

Too much damage has been incurred by the shock therapy. The market value of companies listed on the Jakarta Stock Exchange has plunged by more than 30 percent, resulting in a huge loss of Rp 80 trillion ($27 billion). Allowing the economy to suffer much longer due to lack of liquidity, its lifeblood, risks destroying economic fundamentals and driving the whole economy into a long period of not only recession but also stagflation.

The government should be commended for its strong consistency in the free foreign exchange regime despite the grave currency crisis we now face. We don't see the restriction on forward transactions as a reverse of the open capital account policy. Nor would the measure be detrimental to investor confidence because transactions for investment in Indonesia and for export-import needs are exempted from the restriction.