On foreign currency flows
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