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.