Govt advised to adopt fixed exchange rate system
Govt advised to adopt fixed exchange rate system
JAKARTA (JP): Nobel prizewinning economist Robert Mundell has
advised the government to reintroduce a fixed exchange rate
system for the rupiah within two years in a bid to achieve
sustainable economic recovery.
"Indonesia should move toward inflation targeting and try to
get inflation down to 5 percent or so within two years and then
at the end of that period move toward a fixed exchange rate
(system)," Mundell told reporters on the sidelines of an
economics lecture given by him at Bank Indonesia on Friday.
Mundell, an economist at Columbia University in the U.S., said
he had given some economic advice to President Abdurrahman Wahid
and his new economics team.
He said, however, that Indonesia must first be able to meet
certain requirements in order for the fixed exchange rate system
to be credible.
He said those requirements included strong leadership from the
President, Vice President and the economics team; support from
the people, business sector and also the international community;
ample foreign exchange reserves; commitment to monetary policy to
protect the balance of payments; and a balanced budget.
He said a strong leadership was needed to create a solid
economics team to fully support the plans and to communicate it
effectively to the people, businesses and even the international
community.
"If you cannot meet the five requirements, it's better to wait
until you can. Without these (requirements) it (the fixed rate
system) won't work," Mundell said.
Mundell expected that two years should be enough for Indonesia
to meet the requirements.
Asked to which hard currency the rupiah should be fixed, he
said: "If you ask me today, it would be to the dollar, because
the dollar is the biggest of the currency areas by far, twice as
big as Japan, and it's bigger and stronger right now than the
euro. And much more trade is denominated in dollars than in
euros. Now, it's clearly the dollar but it may change in the
future."
Asked about the advantages of the fixed rate system, he said:
"Better trade, capital movements and an automatic system of
discipline; it will give you a stable price level and a
predictable price level and will give you a lot more foreign
investments.
Mundell declined to say what a fair value of the rupiah would
be, but said he had been told by several local businessmen that
at the current level of about 8,200 to 8,300 per U.S. dollar,
local products were still competitive in the export market.
"In the meantime, try to keep the exchange rate as stable as
you can. Try not to allow it to fluctuate too much," he said.
The rupiah edged higher in quiet trading ahead of the weekend,
with investors failing to react to trade data released on Friday.
The local unit was at Rp 8,295 per dollar in late trading,
down from Rp 8,335 in late Asian trading on Thursday.
Indonesia imposed a fixed exchange rate system for 25 years
before the government introduced a managed floating system, with
an intervention band, in 1996.
The country plunged into a currency crisis which lead to the
current economic crisis immediately after the government
abandoned in August 1997 the managed floating system and fully
adopted the free floating system.
In early 1998, former authoritarian president Soeharto
attempted to introduce the Hong Kong-style currency board system,
pegging the rupiah to a certain currency, but it was widely
rejected by the public and the International Monetary Fund (IMF),
which was providing a multibillion-dollar aid package for the
crisis-hit economy.
The previous chief economics minister, Kwik Kian Gie, also
suggested that the country return to the fixed exchange rate
system. Kwik made the suggestion when he was still an economics
commentator.
Elsewhere, Mundell also said he had given his assessment to
the President on the economic stability program to be implemented
by the new economics ministers.
"He (the President) suggested that I give him a list of
recommendations on macroeconomic policies and he would then give
it to the economics team," Mundell said.
Asked to comment on the new economics team, he said: "The new
economics team probably has 100 days to show that it has a
program in place. And I think it should include a good
macroeconomics plan."
Asked about the role of the IMF in the country, he said that
for the time being, it had a crucial role to restore investor
confidence in the economy.
The IMF is providing the country with some US$5 billion in
bailout aid to finance the 2001-2003 economic reform program of
Abdurrahman's administration. (rei)