On foreign currency flows
I would like to respond to Mr.C.J.de Koning's two articles in your paper "RI's international stakeholders" on Sept. 18, 1998 and "Risk reduction strategy needed" on Sept. 25, 1998.
In his first article, he has likened the foreign currency capital inflow and outflow as water which causes flooding if there is too much and droughts if there is too little. He has suggested the solution may lie in introducing government US$ short term promissory notes (SBI).
And yet in his second article: Risk reduction strategy needed, he conversely suggested that the capital flow was a symptom, not the cause and again short term promissory notes (SBI) in US$ were recommended.
If the foreign currency flows are like water which will cause floods or droughts, then, we would have to build a dam or dike with floodgates to control the flow and also install a pump.
A free-floating exchange rate without control is not only a question of exports and imports based on trade weighting and is also not the cause but is an effect of the overall imbalance in supply and demand of foreign currency flow, especially short term flow.
The primary cause of that sudden massive outflow leading to the dramatic fall in the value of the rupiah against the US$ can be ascribed to confidences -- both domestic and international -- and macroeconomic management, especially the external balance. And the approximate cause is the familiar massive mountain of short term private debt.
The suggestion of introducing government short term US$ promissory notes (SBI) would lead to a similar situation to that which occurred in Latin America's crisis a decade ago, caused by massive short term government debt. Such a suggestion together with existing massive short term private debt would lead us to have the worst devils of two worlds. Such a suggestion is not a risk reduction but a crisis aggrandizement. A more appropriate risk reduction measure is confidence restoration and building.
Indeed President B.J. Habibie made a good point when he said that Indonesia is like a jewel on top of a volcano and after the eruption of the volcano, people would come back to climb the volcano to try to get that jewel. But what if there is another eruption, shock after shock while there are many jewels in the world elsewhere with minor or no eruptions at all.
SIA KA MOU
Jakarta