Long-term capital inflows needed to shore up rupiah

JAKARTA (JP): Indonesia needs policies at the moment that will attract long-term capital inflows in order to shore up the rupiah and revive the dying economy, economist Rizal Ramli and currency market analyst Theo F. Toemion have said.

Speaking at the relaunching of Sinar news magazine here yesterday, they said the interest rates policy currently pursued by the monetary authorities was not an effective way to strengthen the rupiah as it only attracted short-term funds.

"I'm afraid the high interest rate policy, if kept for any longer period, would kill altogether our weak banking system rather than strengthen our rupiah," Rizal told journalists.

"We do not need such short-term capital inflows. What we need is longer-term capital to build our economy and eventually strengthen our currency," he added.

In order to attract long-term foreign funds, he suggested the government liberalize the relatively well-protected micro- industry sectors, especially resource-based sectors, to foreign participation.

"I think there are still many foreign inventors interested in investing in our fisheries and other resource-based sectors."

Rizal also supported the government's move to sell more of its shares in listed state firms to foreign investors and to privatize healthy state firms to get fresh foreign exchange.

"However, everything must be done transparently so the people know exactly what the government is going to do with all those funds," Rizal said.

He said the government could also use some of the proceeds to bail out some private companies' massive debts as they have been named as some of the major culprits behind the rupiah's collapse.

However, as with the privatization program, both the government and the private sector must be transparent in tackling corporate debt.

"The most important thing is transparency and honesty. But the problem is that we are still in the dark as to who owes how much to which foreign creditors," Rizal said.

Theo added that a suitable climate must be developed to attract long-term investment through all-out reforms both in the banking and production sectors and the legal system.

However, Theo added, the rupiah's current instability would make it more difficult for the government to attract long-term funds, which were in turn needed to stabilize the currency.

"So, what short-term policy should the government adopt to stabilize the rupiah? I think the first thing that should be done is to review our free foreign exchange regime," Theo said.

The free foreign exchange regime has given more room for speculators to attack the rupiah, but little maneuvering space for the government to defend it.

In addition to this the government had to speed up banking reform so that banks could function again as intermediary institutions between those who had excess funds and those who needed funding.

"As long as the rupiah is unstable and the banking sector remains vulnerable, it is difficult to attract foreign capital like during our golden time in the early 1990s when we enjoyed massive foreign capital inflows," Theo said.

Both Rizal and Theo said the government also needed credible domestic policies to restore local people's confidence in it.

They contended that domestic confidence in the government was vital for any economic recovery to succeed.

"We do need credible policies, but on top of that we need credible policymakers to restore public confidence," Rizal said. (rid)