IMF urged to take active role in currency crisis

HONG KONG (JP): Indonesian Minister of Finance Mar'ie Muhammad warned yesterday that the currency crisis sweeping Southeast Asia could lead to an economic crisis.

In a speech to the annual meetings of the World Bank and the International Monetary Fund (IMF) here, Mar'ie urged the fund to play an active role in preventing such crises.

"Although we are in favor of market mechanism, we are concerned about the excessive volatility of many currencies which undoubtedly creates uncertainties in the business community and could lead to an economic crisis," he said.

"In this regard, I urge the IMF to take an active role according to its mandate," he said.

Southeast Asian currencies have sharply fallen since Thailand effectively devalued the baht on July 2 due to its financial problems arising from a high current account deficit and bad loans in the banking sector.

Among the hardest hit are the Philippine peso, the Malaysian ringgit and the Indonesian rupiah.

"Since excessive volatility of currencies can hinder the world economy, we warmly welcome any regional or global initiative to stabilize currencies," Mar'ie said.

Over the last two to three years, Mar'ie said, Southeast Asian economies were marked by high economic growth with signs of economic overheating; enlarged current account deficits accompanied by inflationary pressures; growing short-term private borrowings and the construction of huge projects that were beyond the limits of their national economic capacity.

Mar'ie said that countries in the region had recently addressed those problems through structural adjustments.

"As a result, there are positive indications that the currencies are in the process of arriving at a new equilibrium in the near future," he said.

In his speech, he outlined four measures Indonesia was taking to cope with the currency turmoil.

The measures included floating the rupiah in mid-August accompanied by tightening liquidity and interest rates, trimming the state development budget by 8.4 percent and abolishing subsidies, and boosting exports while limiting imports, he said.

Despite belt-tightening measures, Mar'ie said Indonesia "reaffirms its commitment to discharge all of its financial obligations fully and timely".

The government will continue to take efforts to repay its foreign debt ahead of schedule using proceeds from the privatization of state-owned firms.

Mar'ie said the government had also shelved US$35 billion worth of government and private state-related projects financed through borrowings and external credits.

"It is the government's opinion that a number of private megaprojects does not reflect the national priority, therefore they can be postponed," he said.

The objective of those measures, he said, was to lower the current account deficit, which was now at about 3.8 percent of gross domestic product to a maximum of 3.0 percent within the next two years.

In addition, the government should take action to strengthen the financial sector in cooperation with the World Bank and the IMF.

Following the market-friendly measures, the rupiah has now reached "a relatively stable exchange rate" ranging from 2,900 to 2,950 against the US dollar, depreciating by about 24 percent since January, he said.

"This relative stability is partly a result of the market's positive reaction toward the market-friendly measures taken by the government," he said.

"Fortunately, this result was achieved without sacrificing our foreign exchange reserves," he added. (vin/rid)