Minister Mar'ie defends exchange rate policy

JAKARTA (JP): Minister of Finance Mar'ie Muhammad stressed yesterday that the government will continue to pursue flexible exchange rate management to avoid the destabilizing effects of capital inflow.

"We have to maintain the rupiah (exchange rate) as realistic as possible," Mar'ie told a conference of the International Association of Financial Executives Institute here.

Mar'ie warned that there remains concern about the potentially destabilizing effects of capital inflow as private capital flow is now considerably larger than official development assistance.

Mar'ie said that the Mexican crisis of late 1994 offered several lessons for other emerging economies, including Indonesia, to tackle capital inflow.

"One of those lessons is that exchange rate management needs to be flexible," Mar'ie said.

The minister, however, declined to comment on the current development of the strengthening rupiah against major currencies as a result of the strengthening U.S. dollar.

Economist Dorodjatun Kuntjoro-Jakti said the strengthening of the rupiah could undermine Indonesia's exports because it would make Indonesia's goods expensive abroad.

"However, I think it's all right because it is supported by structural factors, including the declining inflation rate," Dorodjatun said.

Mar'ie projected that this year the inflation rate would reach some 7 percent, lower than last year's level of 8.64 percent. As of the end of this month, the year-on-year inflation rate reached 6.5 percent.

He said the government will continue its efforts to keep inflation rates in check, by tightening the country's economy, through fiscal and monetary contraction.

In its efforts to contain the inflation rate, Mar'ie said, the government will continue with its managed exchange rate of the rupiah against the U.S. greenback to discourage speculative inflow of funds.

According to a local financial research center, however, almost one third of funds in Indonesia's banking system is controlled by individual investors who only seek benefits from interest rate differences.

Dorodjatun noted that such speculative inflow of funds would be temporary because the integration of the world's financial market has almost led to a single world currency.

He pointed out that the process of creating a single European currency has been proceeding, and it could be followed by other groupings.

He said the establishment of such a single currency would reduce substantially the cost of matching exchange rates among European countries and the cost of hedging against exchange rate fluctuations.

The Netherlands alone, for instance, could save up to US$8 billion per annum from a united currency because there will be no more speculation on rates, no more hedging, and no more costs to monitor the rates in other European countries, Dorodjatun said.

"There is no need to guess and speculate on the rates anymore, what is needed is just coordination among central banks and monetary authorities," he noted.

He commended the initiatives of several central banks in East and Southeast Asia to cooperate in reducing the risk of sudden destabilizing capital flow. (rid)