Indonesia's currency board dilemma
It is quite normal for international financial institutions (the IMF and the World Bank) to say that Indonesia should not rush into implementing the currency board system before it has fully implemented its current economic reform package. We understand their concern over the possibility that the reform package will not be fully executed.
The warnings given by the IMF and the World Bank deserve to be considered thoroughly. The impression that the only aim of having such a board is to render the central Bank Indonesia sterile with regard to its duties and functions, which are set under Central Bank Law No.13/1967, should be avoided. This is all the more relevant since rumors are circulating that Bank Indonesia Governor J. Soedradjad Djiwandono intends to resign from the cabinet because the central bank is considered to have been unable to keep the rupiah's exchange rate against the U.S. dollar below the Rp 10,000 level.
We know that fluctuations in the value of currencies in this era of globalization are very much determined by market sentiments. Mostly, market players want positive sentiments stemming from such factors as the existence of good governance and a government that is transparent and enjoys good authority because of its commitment to good law enforcement -- strategic factors which can bolster the value of our currency in the international community.
We are now faced with the dilemma of whether to go ahead with setting up a currency board system despite the fact that we have not yet been able to eliminate our high-cost economy, or whether to give first priority to economic reforms, such as suggested by the IMF, and apply the currency board system afterwards.
It should be realized that should the currency board system fail to yield the optimal results desired the effect could be bad for our economy. Among other things, bank interest rates would soar and corruption and collusion would continue to flourish, making it difficult for us to eliminate our high-cost economy.
A currency board could have positive implications for the Indonesian economy if it is bolstered by the presence of a clean government with good authority, and by a change in our bureaucratic mentality and behavior in order to promote a good and selfless working ethos for greater productivity.
-- Bisnis Indonesia, Jakarta