Hanke still sees RI currency board

Hanke still sees RI currency board

WASHINGTON (Reuters): A U.S. economist who wants Indonesia to bring in rigid new rules on currency exchange said yesterday he thought the controversial idea would go ahead, but the timing was up to President Soeharto.

Steve Hanke, a professor of applied economics at Johns Hopkins University in Baltimore, said he spent a total of 10 hours in talks with Soeharto. Hanke outlined his proposal at the Cato Institute, a libertarian think tank.

His plan for a currency board would peg the local rupiah to the dollar and tie cash in circulation to central bank reserves.

The International Monetary Fund says Indonesia's ailing economy is too weak to cope.

"I think it will go ahead," Hanke said. "I cannot give you a precise timetable because President Soeharto will decide... I'm just an economic adviser. What do I know?"

Hanke said last month that a currency board could be introduced in a matter of weeks. But the idea has fueled tremendous debate in Jakarta and in Washington, amid doubts about the strengths of the local banking system.

An Indonesian central banker visiting Chile was quoted on Thursday as saying a decision would not be made for some time.

"Nothing has been resolved with respect to this," Chile's newspaper El Mercurio quoted Burhanuddin Abdullah, deputy head of research on economic and monetary policy at the Bank of Indonesia, as saying.

"We are studying the consequences of this very thoroughly because linking the rupiah to the dollar could affect other sectors of the economy. Until this analysis is made, a decision will not be taken," he added.

He said central bank reserves were not yet large enough to introduce the system.

The main critics of the currency board idea have been the rich industrialized countries which are backing a $40 billion IMF-led rescue package for Indonesia.

The IMF is assessing the state of economic reforms in Indonesia before deciding whether to release a further tranche of its $10 billion share of the bailout.

Monetary sources say the original plans to make a decision by March 15 are likely to be delayed until after a new government is confirmed in office.

Hanke did not say if he had advised Soeharto to forget the idea of IMF funding, but he said he had spoken to investment bankers in Singapore and Zurich after leaving Indonesia.

"I think that might answer your question," he said, noting that the Sultan of Brunei, one of the world's richest men, had met Soeharto last week.

Hanke, who has advised governments in Argentina, Lithuania and other countries on currency boards, said he last spoke to Soeharto last Thursday. He expected to return to Indonesia for more talks after March 11.

Soeharto held two meetings this week with former U.S. vice president Walter Mondale, who traveled to Jakarta as U.S. President Bill Clinton's special representative. White House spokesman Mike McCurry said on Thursday that Clinton and Mondale would discuss the visit soon.

Soeharto has said he is attracted by the idea of a currency board as a way to stabilize the rupiah, which has tumbled more than 75 percent since the middle of last year.