Indonesia currency board must be ambitious: Hanke

Indonesia currency board must be ambitious: Hanke

WASHINGTON (Agencies): A key economic adviser to President Soeharto said the currency board he envisions for Indonesia should be considerably more ambitious than those in other countries, the Washington Post reported Tuesday.

Johns Hopkins University professor Steve Hanke told the newspaper in an interview that a more ambitious currency board was essential because of the need to address weaknesses in Indonesia's banking system. He did not elaborate in the story.

Hanke also said he advised Soeharto to privatize the biggest five state-owned enterprises as part of the plan.

"I advised the president that you've got to take the biggest five; otherwise the markets will be skeptical," Hanke told the Post.

Soeharto said last weekend the International Monetary Fund had not helped stabilize the rupiah with its harsh reform program and a more broad-based effort was needed.

The proposed new plan has been dubbed "IMF-plus" because it expands on the existing arrangement under which the International Monetary Fund was to provide in excess of $40 billion in return for economic reforms.

IMF-plus would include large-scale privatization of state- owned companies, a bankruptcy code, reduction and rescheduling of external debt and the adoption of a currency board system to fix the rupiah to a single dollar rate. Firm details have only just begun to trickle out, however.

The IMF is objecting to a currency board that would peg the Indonesian rupiah to the dollar because it felt the country was not yet ready for the move.

Hanke said Indonesia could support the peg by holding enough dollars to cover the value of all rupiah, in circulation and in banks, according to the Post report.

Hanke said Indonesia could get the money it needed for the effort from international institutions like the IMF, through lines of credit extended by private banks, and from wealthy countries such as Brunei, Indonesia's wealthy neighbor.

Warned

In Tokyo, The head of Hong Kong's Monetary Authority (HKMA), the territory's de facto central bank, yesterday warned Indonesia over its moves towards setting up a currency peg.

Indonesia would have to meet a number of tough requirements before a peg could work, Joseph Yam told a meeting of businessmen here.

Hong Kong is the only territory in Asia which now has a peg, with the Hong Kong dollar linked to the greenback through a currency board system.

"If you run a huge budget deficit, it won't last. If you don't adhere to the discipline of a currency board system, it won't last.

"If Indonesia satisfies the preconditions I wish them well but if they don't actually satisfy the preconditions then I think they should be careful, " he said.

He warned Jakarta to also avoid a huge balance of payments deficit, poorly capitalized banks and a lack of banking supervision.

Yam said the Asian financial crisis grew from poor supervision of financial liberalization across the region, particularly in Indonesia, Thailand and South Korea.

There was a lack of efficient "financial intermediation," he said.

Europe

Meanwhile, a senior French finance official said in Singapore yesterday Europe's participation in a Singapore initiative for a multilateral scheme to guarantee payment for Indonesian imports is dependent on Indonesia's adherence to IMF-mandated reforms.

"It can be done if the IMF conditionalities are respected. We are ready to be helpful. We are ready to find the right means," Jean Lemierre, director of the Treasury of France, said at a news briefing.

The scheme proposed by Singapore Prime Minister Goh Chok Tong last month was aimed at helping Indonesia acquire up to 20 billion US dollars in foreign guarantees for imports of basic necessities.

"We (France) say there has been one decision taken in London so there has been a clear answer to the Singaporean idea ... There may be other means to do that. They key questions do not lie in technicalities. The key question is, 'Are the IMF conditions being respected?" he said.

Severe

In a related development, U.S. Commerce Secretary William Daley said on Monday he found agreement during a recent trip to Asia that the region's financial crisis appeared to have stabilized apart from the situation in Indonesia.

"There was general agreement that with the exception of Indonesia, the situation in ASEAN (Association of South East Asian Nations) seems to have stabilized, although there may be a few more bumps on the road," he told a conference in New York. The text of his speech was made available in Washington.

Daley said Thailand and the Philippines seemed to be on the road to economic recovery and Singapore was "doing well".

"Indonesia clearly has the most significant problems," he said. The currency devaluation made importing food difficult and forest fires were exacerbating the country's problems.

"Economic unrest is now spilling over into the political realm, with legitimate fears of widespread ethnic violence," he added.

Daley said the United States would take additional measures to alleviate the plight of Asian economies suffering liquidity problems that have hurt their ability to finance imports.

"I am suggesting to the President (Clinton) that we need to develop additional export financing initiatives that will mitigate the severe credit constraints on importers of U.S. goods and services building on efforts already undertaken by the U.S. Export-Import Bank."