News of impending IMF visit fails to bring cheer to rupiah

JAKARTA (JP): The rupiah dropped again on Friday despite news that the International Monetary Fund (IMF) mission would visit Jakarta on Wednesday.

The local currency, which fell to its low of Rp 10,940 against the U.S. dollar in early trade, eased slightly to close at Rp 10,875, following intervention by Bank Indonesia (BI).

Despite the slight gain, the Indonesian unit was, however, still lower when compared with its level of Rp 10,740 in late trading on Thursday.

Currency analyst Farial Anwar said that the further fall of the rupiah was partly due to the fall in other regional currencies, which have been weakening against the dollar over the past few days.

Farial said that the internal factors which had been putting pressure on the rupiah were still basically the same: political uncertainty and negative developments on the economic front.

He said that the rupiah could soon move through the new Rp 11,000 resistance level.

Farial said that on the political side, worsening relations between embattled President Abdurrahman Wahid and his opponents had been creating jitters in the currency market, particularly with the latest reports of Abdurrahman's supporters planning a holy war.

Media reports saying that the President doubted the competence of Vice President Megawati Soekarnoputri to become President also played a part in the loss of confidence in the local currency.

Farial said that on the economic side, reports that the 2001 state budget deficit could be greater than projected had also undermined confidence.

Coordinating Minister for the Economy Rizal Ramli said this week that the deficit could exceed 5 percent of gross domestic product (GDP) compared with the original estimate of 3.7 percent of GDP, unless measures were taken immediately.

Farial said fears of a further slide in the rupiah had prompted corporations to purchase dollars, including those for the purpose of debt repayment.

"But there are also those holding huge cash sums who are purchasing dollars in a flight toward hard currency," he said, pointing out that some people perceive the dollar as a safer currency, while investment in the rupiah is haunted by the specter of inflation, higher tax, and depreciation.

It is expected that the IMF would send a mission to Jakarta on Wednesday to review the possibility of the Fund to disburse the latest, but currently stalled, US$400 million loan tranche to Indonesia.

"The mission should start work next Wednesday...all conditions for the mission (to visit) have been met," IMF Indonesia representative John Dodsworth told Reuters.

"But the market has already discounted this," Farial said.

Dodsworth said earlier this week that the IMF mission would make the visit early next week, after a panel of international and domestic experts have completed the review of the government- proposed amendment of the central bank law.

Earlier in the day, BI Governor Sjahril Sabirin stated that he expected the rupiah to appreciate with the visit of the IMF mission.

"Let's hope the IMF team can reach agreement with the government ... this will help the rupiah," Sjahril said.

He added that if the rupiah appreciated, there would be room for the central bank to allow the interest rate of its SBI promissory notes to decline.

The SBI interest rate has been increasing during recent weeks, raising concern that it would create trouble for some banks.

It remains unclear, however, whether the IMF mission will be able to reach agreement with the government over key economic reform issues. The remaining important issues include slow progress in corporate debt restructuring and concern over the controversial amendments to the central bank.

The IMF postponed disbursement of the next tranche of its loan to the country in December last year due to signs of the government wavering in its key economic reform program, including delay in the divestment of government ownership in Bank Central Asia and Bank Niaga, and concern over the poor implementation of fiscal decentralization policy and the amendment of the central bank law.

But the legislature has recently approved the bank divestment plan, and the government has issued a decree banning provincial and district administrations from borrowing for the time being.

The delay in the disbursement of the IMF loan also prompted other international lenders to put on hold their assistance to Indonesia, and creditors threatened to cancel the restructuring of the country's sovereign debt.

The panel of experts is expected to complete the review of the proposed amendment of the central bank law on Sunday, and to report to the government.

The IMF has expressed concern that the proposed amendment of the central bank law would jeopardize the independence of BI. (rei)