IMF hails RI's step to float rupiah

IMF hails RI's step to float rupiah

WASHINGTON (Reuter): The International Monetary Fund on Thursday welcomed Indonesia's decision to allow its currency to float, saying the move would allow the country's economy to continue its recent impressive performance.

"In present circumstances, a floating exchange rate will enhance the effectiveness of macroeconomic policies aimed at sustaining high rates of growth with financial stability," said Stanley Fischer, acting managing director of the IMF.

Indonesia floated the rupiah on Thursday, scrapping a previous system under which the central bank set daily bands in which the currency could trade against the dollar.

Fischer called Indonesia's decision timely and said it came partly in response to turbulence on regional currency markets. He said floating the rupiah was "in line with Bank Indonesia's steady progress toward greater exchange rate flexibility, particularly over the last two years."

"The floating of the rupiah, in combination with Indonesia's strong fundamentals, supported by prudent fiscal and monetary policies, will allow its economy to continue its impressive economic performance of the last several years," Fischer said in a statement.

Officials described the new system as a free float, but also they said the central bank would intervene to smooth adjustments.

Wednesday's intervention band was 2,378/2,682 rupiah per dollar and the rupiah fell sharply after the bands were removed. It traded at 2,770 to the dollar in New York.

Yesterday, the spot rupiah further plunged to close at 2,880 to the dollar in Jakarta.

Indonesia was the latest country in Southeast Asia to experience speculative pressure and abandon an expensive currency peg. Thailand floated the baht on July 2 and the Philippines followed suit just over a week later.

Indonesian central bank governor Soedradjad Djiwandono said the bank's decision brought Indonesia closer into line with other free-floating currencies in the region.

"We are adjusting to the new realities," he said. "The new reality in the ASEAN (Association of South East Asian Nations) region is floating (currencies)."

Indonesia had already responded to speculative pressure by widening the rupiah's trading band, but the current decision removed the need for the central bank to spend reserves defending a new target.

The international community on Monday approved a US$16 billion loan package for Thailand, including $4 billion from Japan and $4 billion from the IMF, to help ease a cash crunch triggered by the decision to float the baht.

The IMF has also offered the Philippines $1 billion in loans.