Government to announce new exchange rate steps

JAKARTA (JP): The Indonesian government will soon announce new steps for the foreign exchange rate system to stabilize prices of priority imports and help restore order to the country's economy.

"We have to determine a stable exchange rate to enable import- dependent manufacturing companies to make orderly business programs and to facilitate stable imports of basic necessities," President Soeharto told members of the Indonesian Ulemas Council (MUI) at the Bina Graha presidential office yesterday.

President Soeharto said Indonesia had an adequate level of foreign exchange reserves to support imports of raw materials which are components for export-oriented companies.

The rupiah closed at 9,600/9,800 to the U.S. dollar yesterday, slightly lower than last week's close at 9,400/9,600.

Currency dealers said the central bank intervened in the currency market to help prop up the rupiah.

Stock prices in the Jakarta Stock Exchange (JSX) fell 1.1 percent yesterday with the main price index falling by 6.17 points to 529.25 points.

"We will use them (reserves) to import raw materials, spare parts and other things, such as medical supplies for ordinary people, overseas studies and paying for haj pilgrimages," Soeharto said.

"If our industry cannot get raw materials, they will stop production," he said.

"If the industries stop, there will be more unemployment and unemployment will trigger unrest because they will have no income," he said.

President Soeharto again called on the people not to buy up American dollars as it would hamper the government's latest economic measures.

"People should refrain from buying dollars if they are not engaged in the import of raw materials, components or other goods needed for domestic manufacturing," the President said.

The central bank, Bank Indonesia, said recently that Indonesia's foreign exchange reserves stood at US$19.06 billion as of the end of last month, enough to cover 4.7 months of imports.

The President said the government had used some of its foreign reserves to intervene in the currency market to prop up the rupiah against the dollar but such interventions were not effective since the dollars injected into the market were immediately absorbed by speculators.

"Now we will take other steps that can kill them (speculators)," Soeharto asserted.

The rupiah has fallen by about 75 percent against the dollar since last July.

President Soeharto said wild rumors had also set off violence in several towns due to soaring prices of essential goods.

Rumored or actual scarcity of essential goods and rising prices have triggered riots in several towns in Java, Sulawesi and the eastern part of the country over recent weeks.

Bank Indonesia Governor Soedradjad Djiwandono told a House of Representatives hearing yesterday that the government was now studying the possibility of using a currency board system in a bid to stabilize the rupiah against the U.S. dollar.

"We are studying it carefully now, so that when it is applied, it should not cause any losses," Soedradjad said.

He said the government was considering all the advantages and disadvantages of the currency board system before being applied.

Miranda S. Gultom, a managing director of the central bank, said that the government was also studying other alternative exchange rate systems and would soon announce a system to be adopted.

"The most important thing is for the new system to be efficient and for it to be able to increase productivity in the real sector," Miranda said.

Steve Hanke, a U.S. economist, who is one of the leading proponents of the currency board, met President Soeharto, economic advisor Widjojo Nitisastro and other senior financial advisors last week and submitted a proposal on the possibility for the Indonesian government to use the system.

The currency board system would peg the rupiah to a foreign currency at a fixed rate with foreign exchange reserves fully matching the volume of currency in circulation. (prb/aly)