IMF 'not against' govt's CBS plan

IMF 'not against' govt's CBS plan

JAKARTA (JP): The International Monetary Fund (IMF) is not
entirely against the government's plan to adopt a currency board
system (CBS), the fund's liaison official for Indonesia said
yesterday.

Prabhakar Narvekar, however, cautioned that Indonesia should
take into account all necessary factors before taking any
decision on pegging the rupiah to a fixed exchange rate.

"In principle IMF is not against the CBS, but we have to
discuss the aspects of it," Narvekar said in a departure from
last week's threats by IMF managing director, Michel Camdessus,
to discontinue aid to Indonesia over disagreement on the plan.

Narvekar said he and Soeharto again discussed the Indonesian
move on the CBS, but he declined to further comment.

"On what the President thinks about it, better ask him," he
replied to reporters who asked him about the President's view of
the CBS controversy.

The IMF economist indicated that Indonesia's economic problems
were complex and they could not be overcome in simple ways.

"This is a big country, a vast country with more than 200
million people... There are many problems, many opportunities,
many challenges," Narvekar noted.

Camdessus confirmed Monday in Brussels that he had written to
President Soeharto last week spelling out the IMF's opposition to
Indonesia's establishment of a currency board.

The Washington Post reported yesterday that Soeharto told
President Bill Clinton in a telephone call Friday that the IMF
was failing to stem his country's financial crisis and that was
why he had proposed a major change in Indonesia's monetary
system.

Steve Hanke

Narvekar said he has met with Steve Hanke, the President's CBS
adviser, to exchange views on the new monetary system.

U.S. economist Steve Hanke contended yesterday that fears of
skyrocketing interest rates after the implementation of a CBS
were exaggerated.

Hanke recounted that the experiences of countries which have
successfully implemented a fixed exchange rate under a CBS, such
as Argentina and Bulgaria, showed that interest rates would not
create problems.

"Their interest rates came down shortly after implementing the
system," he said.

"As a general proposition, you could say that it's the
confidence that brings down interest rates," he noted.

A CBS is a monetary regime based on an explicit legislative
commitment to exchange domestic currency for a specified foreign
currency at a fixed rate.

Although no details are available yet on the plans, many
analysts believe that the rupiah would be pegged to the U.S.
dollar at a fixed rate of between Rp 5,000 and Rp 6,000.

A number of economists have expressed great concern that the
CBS would push Indonesian interest rates to alarming levels since
the system would initially trigger a massive scramble for
dollars.

Such concerns have been expressed by economist John Greenwood,
who was the architect of the CBS in Hong Kong.

"I disagree with John on this," said Hanke, an economist at
John Hopkins University in Baltimore, who first explained the CBS
to President Soeharto in early February.

He pointed out that when the need for a CBS was considered by
President Soeharto, the rupiah rate on the spot market picked up
strongly to as high as Rp 7,000 against the greenback from more
than Rp 10,000 previously.

"This clearly indicates that the market saw the CBS
alternative as credible," he said.

He noted that the interest rate drop in the swap market also
contradicted the worries that a CBS would create a rush from the
rupiah to U.S. dollars.

"The forces of arbitrage are just too great, and will overcome
these things," he said, pointing out that there would be a
portfolio shift in which people would convert their dollars to
the rupiah anytime the interest rates rose steeply.

"This would then create confidence and bring capital inflow,
and return liquidity back into the economic system."

Hanke, however, declined to give further technical details on
CBS operations as they were still being discussed.

"I have not finished my due diligence, and evaluated the
situation completely," he said.

Preconditions

Hanke said there were no preconditions for the implementation
of a CBS, pointing out that when Bulgaria planned a CBS, that
country was in a more unstable condition than Indonesia.

"The best Brady bonds in 1997 was the Bulgarian Brady bonds,"
he added, referring to the positive impact of the CBS on
Bulgaria.

He described an economy with hyperinflation and collapsing
currency as a doomsday scenario for the current monetary regime.
"So the lowest risk option is the CBS," he said.

Hanke also stressed that the government's CBS plans did not
contradict its Jan. 15 agreement with the International Monetary
Fund.

"This was one thing that President Soeharto wants to ensure.
CBS should not in any way be in conflict with the reform
package," he said.

"CBS is no substitute to the IMF-arranged rescue reform
package. It instead will complement the programs," he said,
pointing out that the implementation of the package would be made
easier and smoother when the CBS was in place.

Instead, Hanke added, the package faced greater risks of
failure if the current monetary regime was still in
place.

U.S. Senator Lauch Faircloth said in a statement issued here
yesterday that the IMF should support Indonesia's CBS plan and
not stop it.

The chairman of the financial institutions subcommittee of the
U.S. Senate banking committee, contended that the IMF and the
U.S. Treasury Department were working feverishly to stop
Indonesia from creating a CBS.

"A CBS is a strong dose for Indonesia's economic woes, and it
will go a long way to establishing confidence in Asia," he
pointed out in the letter dated Feb. 13. (prb/08)