Mar'ie, experts welcome capital control plan

JAKARTA (JP): Former finance minister Mar'ie Muhammad has welcomed the government's plan to introduce as yet unspecified forms of capital controls to help stabilize the beleaguered rupiah.

"The current foreign exchange regime is too free and needs some regulation," Mar'ie told reporters on the sidelines of a seminar.

He added that most of financial market practitioners who convened in Shanghai for the recent Pacific Rim gathering which he attended were agreed on the need for some form of capital controls.

He stressed, however, that the government should not copy Malaysia and peg its currency to a fixed rate against the U.S. dollar, saying this would not serve as a quick-fix for the ailing rupiah.

"If we immediately fix our currency, I'm afraid that a black market would flourish and that would be counterproductive. A natural appreciation of the rupiah would be much better and more sustainable," said Mar'ie.

Mar'ie, who was finance minister until the middle of March, is now chairman of the Indonesian Transparency Society and president commissioner of state-owned Bank Mandiri. The bank was recently established to absorb four troubled state banks that will shortly be merged.

"What is needed is some form of regulation to bring order to the inflow and outflow of foreign exchange," he said.

Marzuki Usman, chairman of the Indonesian Society of Economists, agreed that cross-border capital movements needed to be brought to order through regulation.

"Even in the U.S., currency transfers of more than $10,000 require reporting forms to be filled out," added Marzuki, who is also the Minister of Tourism, Arts and Culture.

Mar'ie said that among the alternatives that could be adopted was a regulation requiring exporters to repatriate their export earnings and report their foreign exchange revenues to Bank Indonesia.

"Let the government decide on what form of capital flow regulations will be adopted. I will support any move which results in better monitoring of capital flows," he said.

Mar'ie and former Bank Indonesia governor Soedradjad Djiwandono decided to free float the rupiah in August last year to secure the country's foreign exchange reserves in the midst of an intensive attack by speculators on the rupiah which followed a sharp devaluation of the Thai baht. However the rupiah continued to tumble, falling to as low as Rp 17,000 against the dollar in January of this year. The rupiah traded at around Rp 2,450 to the dollar before July last year.

Coordinating Minister for Economy, Finance, and Industry Ginandjar Kartasasmita said on Thursday that a regulation forcing exporters to repatriate their hard currency was an "attractive option", but said that the government was also looking at other options, including a system of capital inflow monitoring and taxation currently used in Chile.

He stressed, however, that the latter did not constitute a form of capital control.

"We will continue to adhere to an open capital account," he told reporters on the sidelines of a meeting of trade ministers of the Association of Southeast Asian Nations in Manila.

Market players and analysts, however, said that any rule forcing exporters to report their hard currency earnings or surrender them to the central bank could be interpreted as an undue control on the movement of capital.

Official confirmation that the government is considering various capital control options coupled with improving sentiment in regional currencies helped the rupiah to strengthen to levels not seen since riots rocked the country in May.

The rupiah closed at Rp 9,100 against the U.S. dollar on Thursday, well above the government's year-end target of Rp 10,000.

Separately, economist Faisal Basri said he believed the government would force exporters to repatriate their foreign earnings.

"I think the government is moving in that direction. They will introduce the regulation when the exchange rate is deemed to be low enough," he told reporters on Thursday.

He said the right time to introduce controls would be when the rupiah strengthened to a point that speculators were shifting from dollar to rupiah positions.

He also shared Mar'ie's view that the government should not follow Malaysia's example, saying that a strong and trustworthy bureaucracy was a prerequisite for any such measures to succeed.

"Our bureaucrats are corrupt," Faisal added. (rei)