Mohamad Sadli, BIS warn of great risks of CBS
Mohamad Sadli, BIS warn of great risks of CBS
JAKARTA (JP): Former minister Mohamad Sadli warned the
Indonesian government yesterday against adopting a currency board
system (CBS) without IMF endorsement and support.
It would be very dangerous to implement a CBS without prior
approval from the IMF, Sadli said, adding "I cannot imagine how
Japan would assist Indonesia if the CBS was launched without IMF
endorsement."
He cautioned that the bulk of the funds used by the
International Monetary Fund for its operations were put up by
industrialized countries, including Japan and the United States.
"I congratulate Bank Indonesia (central bank) and say
goodbye," he told Antara news agency in a comment to a central
bank director's assertion that the government had enough foreign
reserves to support CBS operations.
According to Sadli, Indonesian foreign reserves (put at US$17
billion) are not enough to fight fund managers under CBS.
Asked whether American economist Steve Hanke, Indonesia's
adviser on CBS, was associated with the IMF, Sadli quipped "I
know nothing about him".
In Bali, the Swiss-based Bank for International Settlements
(BIS) warned economies with free-floating currencies yesterday
that they should be prepared to pay the cost of embracing
currency peg arrangements.
Without naming Indonesia, BIS General Manager Andrew Crockett
said governments should seek an exchange rate regime that avoided
"this dilemma" unless they were prepared to accept the full
rigor and logic of fixed rates.
Crockett issued the warning in a speech at a Southeast Asian
central bankers' meeting on this resort island.
Indonesia's plan to set up a currency board to manage a Hong
Kong-style peg for the rupiah has triggered fresh market turmoil
amid growing doubts over Indonesia's capacity to sustain such an
arrangement.
Crockett said it would be difficult to make changes in an
exchange rate peg that had come to symbolize an overall
macroeconomic strategy.
"I also know that the penalties for not making an adjustment
in time are severe," Crocket was quoted by AFP as saying.
But Crockett said he did not mean that countries should always
adopt free floating exchange rates as that would not necessarily
be an optimum policy in emerging markets, whose financial systems
were not fully developed.
He cited Hong Kong and Argentina as examples and said they had
successfully operated a currency board system for years.
But he stressed that the exchange rate regime must be adopted
to the capacity of domestic policy and institutions to take the
burden of adjustment.
"Where political or other factors make it difficult for
domestic adjustment mechanisms to take the strain of reversals in
capital flows, then the exchange rate had to be the safety valve.
"If the exchange rate regime makes it difficult to make timely
changes in the external value of a currency, then disequilibria
can build up that add immeasurably to the abruptness and costs of
the eventual adjustment," Crockett said.
JAKARTA (JP): Former minister Mohamad Sadli warned the
Indonesian government yesterday against adopting a currency board
system (CBS) without IMF endorsement and support.
It would be very dangerous to implement a CBS without prior
approval from the IMF, Sadli said, adding "I cannot imagine how
Japan would assist Indonesia if the CBS was launched without IMF
endorsement."
He cautioned that the bulk of the funds used by the
International Monetary Fund for its operations were put up by
industrialized countries, including Japan and the United States.
"I congratulate Bank Indonesia (central bank) and say
goodbye," he told Antara news agency in a comment to a central
bank director's assertion that the government had enough foreign
reserves to support CBS operations.
According to Sadli, Indonesian foreign reserves (put at US$17
billion) are not enough to fight fund managers under CBS.
Asked whether American economist Steve Hanke, Indonesia's
adviser on CBS, was associated with the IMF, Sadli quipped "I
know nothing about him".
In Bali, the Swiss-based Bank for International Settlements
(BIS) warned economies with free-floating currencies yesterday
that they should be prepared to pay the cost of embracing
currency peg arrangements.
Without naming Indonesia, BIS General Manager Andrew Crockett
said governments should seek an exchange rate regime that avoided
"this dilemma" unless they were prepared to accept the full
rigor and logic of fixed rates.
Crockett issued the warning in a speech at a Southeast Asian
central bankers' meeting on this resort island.
Indonesia's plan to set up a currency board to manage a Hong
Kong-style peg for the rupiah has triggered fresh market turmoil
amid growing doubts over Indonesia's capacity to sustain such an
arrangement.
Crockett said it would be difficult to make changes in an
exchange rate peg that had come to symbolize an overall
macroeconomic strategy.
"I also know that the penalties for not making an adjustment
in time are severe," Crocket was quoted by AFP as saying.
But Crockett said he did not mean that countries should always
adopt free floating exchange rates as that would not necessarily
be an optimum policy in emerging markets, whose financial systems
were not fully developed.
He cited Hong Kong and Argentina as examples and said they had
successfully operated a currency board system for years.
But he stressed that the exchange rate regime must be adopted
to the capacity of domestic policy and institutions to take the
burden of adjustment.
"Where political or other factors make it difficult for
domestic adjustment mechanisms to take the strain of reversals in
capital flows, then the exchange rate had to be the safety valve.
"If the exchange rate regime makes it difficult to make timely
changes in the external value of a currency, then disequilibria
can build up that add immeasurably to the abruptness and costs of
the eventual adjustment," Crockett said.