New forex tax 'may not be appropriate'

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)