Minister Mar'ie defends exchange rate policy
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)
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)