Indonesia adopts law on forex movement

JAKARTA (JP): The House of Representatives passed on Tuesday a bill that empowers Bank Indonesia to track the flow of foreign exchange in and out of the country.

The bill requires individuals and legal entities to inform Bank Indonesia, or other parties appointed by the central bank, of the transfer of stipulated foreign exchange or rupiah currency amounts in and out of the country.

Banks and other entities involved in foreign exchange movements are also required to report the transactions to the central bank.

The system, however, will be voluntary, as the bill does not stipulate any penalty for those who do not report their foreign exchange or rupiah transfer in and out of Indonesia.

Finance Minister Bambang Subianto said the foreign exchange monitoring law was not designed to impose capital controls in the country.

He reiterated the government was committed to maintaining an open capital account.

"This bill maintains the free foreign exchange system (which has been adopted since 1970), with improvement in the monitoring on foreign exchange flows," Bambang told the House's plenary session.

Bank Indonesia Governor Sjahril Sabirin said after the plenary session, the central bank would not limit the transfer of currencies as the country still adopts the free foreign exchange criterion.

"The only restriction is that foreign exchange transactions must be reported," he said.

He said a decision would be made soon on the transfer amount to be reported.

Spokespersons from the House's four factions -- the ruling Golkar, the Armed Forces, the United Development Party and the Indonesian Democratic Party -- hailed the law as a means to safeguard the country from negative impacts of the free foreign exchange regime.

"The free foreign exchange regime needs to be supported by a foreign exchange monitoring system to ensure the availability of information on every foreign exchange transaction in Indonesia," Golkar faction spokesman Abdul Karim Hanggi said.

The foreign exchange monitoring bill was controversial since its drafting stage, as some foreign market players speculated that Indonesia would restrict capital flows.

The bill was drafted after Indonesia witnessed massive capital flight after the Asian crisis hit the region in July 1997.

The government, with the support of the International Monetary Fund, has been working on the new law for some time, as a means to obtain a better idea of the amount of foreign currency flowing in and out of the country.

Bambang said accurate information about foreign exchange flows would enable Bank Indonesia to design a better monetary policy to maintain the stability of the rupiah exchange rate and contain inflation.

With the passage of the foreign exchange monitoring bill, Law No. 32/1962 on foreign exchange movement is nullified. However, the bill stipulates that all supporting regulations will remain in place as long as they do not contradict the bill.

The bill maintains an open capital account but does not mention an exchange rate system for the rupiah. The bill leaves the exchange rate decisions with the government in consultation with the central bank.

The bill states the rupiah exchange rate systems that the government can adopt are the fixed rate, the floating rate and the managed floating rate. (rid)