Sat, 03 Jun 2000

Govt mulls capital control to protect rupiah

JAKARTA (JP): Minister of Industry and Trade Luhut Pandjaitan confirmed on Friday that the government was studying the possibility of imposing capital control to arrest the falling rupiah.

"Frankly speaking, Indonesia's foreign exchange regime is so liberal that we need to make some necessary adjustments," he told reporters.

Luhut, who was the Indonesian ambassador to Singapore before his current job, said the risk of applying capital control would be less than letting the currency fluctuate freely like it is now.

"The risk is actually low, and there should not be any major concern about this plan," Luhut said on the sidelines of a seminar.

He said the government's main objective to control the flow of currencies was to stabilize the rupiah and prevent the currency from being used for speculative trading.

Amid heightened talks of the possibility that Indonesia would impose currency control, the rupiah gained ground on Friday, while stock prices fell another 2.2 percent.

Foreign exchange dealers said speculation that the government would impose currency control helped boost the rupiah to close higher at Rp 8,385 to the U.S. dollar from Rp 8,630 on Wednesday.

This was unlike the foreign exchange market, where worries over the capital control plan brought another blow to the local stock market, which has been under pressure for the past several weeks due to lingering uncertainty over domestic political and social conditions.

The Jakarta Stock Exchange (JSX), hitting another one-year low on Friday, ended down by 2.2 percent, or 9.87 points at 444.44 points due to worries of currency control. The index lost nearly 40 percent of its value this year.

Speculation that Indonesia will adopt capital control is not totally new, but this time investors feel more nervous after the International Monetary Fund's (IMF) new managing director Horst Koehler said in Bangkok over the weekend that capital control was not taboo.

Investors fear the IMF boss could give a green light to an Indonesian capital control plan. Koehler, unlike previous IMF top officials, is more open to the idea of a country adopting a currency control system.

The foreign exchange and equity markets expect to get a clearer picture on the prospect of the capital control plan when Koehler, who is now in South Korea, meets President Abdurrahman Wahid and his economic team on Sunday.


Bank Indonesia governor Sjahril Sabirin opposed the "all-out" capital controls, but said he would consider some measures to control the flow of foreign exchange in and out of the country and to ensure stability in the currency's value.

"I don't believe in applying capital control in Indonesia. But we may, of course, discuss whether we can benefit from taking measures in limiting the flow of rupiah," Sjahril said.

Agreeing with Sjahril, chairman of the Indonesian Chamber of Commerce and Industry Aburizal Bakrie expressed disagreement if the government imposed capital control even if it was to help strengthen and stabilize the ailing rupiah.

Aburizal said the plan was against the country's law, which stipulated an open capital regime.

"I don't agree with the plans to impose capital control," he said at a news conference at the headquarters of the National Business Development Council (DPUN).

But he agreed that steps must be taken by the government to help stabilize the exchange rate of the rupiah to the U.S. dollar.

He suggested that the government should encourage the country's exporters to keep their foreign exchange earnings at home to help support the rupiah.

But Aburizal, more popularly known as Ical, said the central bank should also have a swap facility so that exporters can purchase back the dollars at the same rate they sold them at.

"Through this mechanism, the exporters do not lose anything except for the capacity to be involved in currency speculation," he said.

Ical said the country's export revenue reached more than $4 billion per month, which would greatly help the economy if it is kept in the country.

Meanwhile, head of DPUN Sofyan Wanandi said he did not believe the government would impose capital control.

"I don't believe there will be capital control here," he said at the same news conference.

A few economists voicing similar views said Indonesia was not ready for currency control as the country still had huge overseas debts and a bureaucracy where corruption, collusion and nepotism was still rampant.

"Indonesia's economy is currently recovering, thus, it needs foreign capital inflow, short term as well as long term. But introducing currency control would scare them away," one economist said.(udi/rei)