Sat, 02 Sep 2000

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)