New forex tax 'may not be appropriate'

JAKARTA (JP): The new 5 percent tax on foreign exchange transactions which came into effect today will have little effect in stabilizing the rupiah because it will not prevent substantial speculation on the currency, experts said over the weekend.

I Nyoman Moena said the new measure would most likely fail to control speculators from profiting from the collapse of the rupiah against the U.S. dollar, as they would still be able to work around it.

"If the measure is merely to stop housewives from buying foreign exchange, it could work, but it will be difficult to control speculators," Moena said.

In an effort to reduce speculation on foreign exchange, in particular the U.S. dollar, the government imposed a 5 percent tax on foreign exchange purchases by individuals or legal entities.

The rupiah has lost about 70 percent of its value against the U.S. dollar since the dollar rush first hit the country in early July.

The foreign exchange tax will not be imposed on foreign exchange purchases made by authorized money changers or commercial banks.

Importers or those repaying offshore debts are exempt from paying the tax, providing they submit confirmation letters of letters of credit from the issuing banks or letters from the central bank confirming that the companies do have foreign debts.

Moena, chairman of the Supervisory Board at the Domestic Banks Federation, said speculators could dodge the tax by obtaining fake letters of credit (L/Cs) from issuing banks, or by forging Bank Indonesia letters confirming they have to repay offshore debts.

He said the government must also update its trade regulations in line with the new income tax because, since 1983, not all export and import trade had to use letters of credit. Instead they could get credit from manufactures or obtain goods on consignment.

Economist Anwar Nasution, dean of the University of Indonesia's Economic Schools, warned that the new measure would aggravate people's diminishing trust in the government.

It will only prompt people to transfer their rupiah to overseas banks and change them into dollar deposits, Anwar said.

Besides, it will burden people wanting to go abroad on business or send their children abroad to study.

The government has already increased travelers' departure tax from Rp 250,000 to Rp 1,000,000.

A joint venture bank vice president, who spoke on condition of anonymity, chorused Moena's statement and said the new ruling was aimed only at small speculators.

He said the main source of speculation was in the interbank market, but the new ruling did not clearly state that interbank foreign exchange transactions were subject to the new tax.

"The ups and downs of the rupiah is not determined by housewives, but by operators in Singapore. Therefore, efforts must be focused on how to control them," he said.

Legislator Idra Bambang Utoyo, vice chairman of the House of Representatives Commission VIII for budget and finance, agreed that the new measure should target interbank transactions.

"Although this measure targets only small speculators, we must support it. But I believe the government will follow up on this measure to cover interbank transactions," he said.

The joint venture bank executive said that even if interbank transactions were subject to such a 5 percent tax, it would not altogether stop speculation on the rupiah.

If the aim is to control speculation, he said, the central bank should apply a limitation on dollar-rupiah trading by offshore banks with onshore banks, including branches of foreign banks here, unless for trading with underlying transactions.

The central bank could also reintroduce a trading band, supported by a trading suspension system. Domestic banks, when conducting dollar-rupiah trading, must trade within the band. Once they break the band, their transactions are suspended.

"This way, the government can control the rupiah exchange rate without being obliged to intervene in the market, because if it has to intervene, its reserves will not be enough to support it," he said.

"However, the government must set the band at a realistic level. The first time, for instance, the government could set the band at 10,000/10,500. Then one week later, it could set it at 9,500/10,000 and so forth until the level the government wants is reached," he added. (das/rid)