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)