President confident of CBS therapy

JAKARTA (JP): President Soeharto expressed confidence yesterday that a currency board system (CBS) would be Indonesia's best and least-risky option to stabilize the rupiah exchange rate, an American economist said.

The President was encouraged with the positive international market reaction to Indonesia's plan to peg the rupiah to the U.S. dollar at a fixed exchange rate, Steve Hanke, the President's CBS adviser, said yesterday.

"Although there are risks in the CBS, those risks are very tiny compared with the risk of retaining the current monetary arrangement which we have in Indonesia," Hanke quoted the President as saying.

A CBS is a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.

Hanke, a professor at John Hopkins University in Baltimore, met with Soeharto for the second time yesterday afternoon at the President's residence on Jl. Cendana, Central Jakarta.

Last week Hanke briefed the President on the advantages of Indonesia implementing the currency board arrangement to stop the rupiah's wild volatility against the American dollar.

Soeharto, convinced by Hanke's technical arguments on the benefits of the CBS, then appointed the American economist as an advisor to the Economic and Monetary Resilience Council, which he himself chairs.

The President told Hanke yesterday that he was also confident the adoption of the CBS would not violate his 50-point reform agreement made with the International Monetary Fund (IMF) on Jan. 15.

Hanke recalled that the IMF has previously mandated some other countries like Bosnia to adopt a CBS as a condition for its assistance.

"President Soeharto, of course, wants to see it (CBS) as part of the process. We discussed it in detail. No problems," Hanke remarked.

Soeharto held a 75-minute meeting with IMF liaison officer Prabhakar Narvekar at the Bina Graha presidential office yesterday morning to discuss Indonesia's move on the fixed exchange rate system.

"Whatever the comment, the President can make it," Narvekar said shortly after the meeting. He refused to answer further questions from reporters.

Hanke said the President indicated that "I should meet with him (Narvekar) to carry on discussions," Hanke noted.

The economist said he and Soeharto both felt the CBS would help achieve the objectives stated in the IMF-arranged rescue package more rapidly.

The rupiah strengthened this week after news that the President would adopt the CBS to stabilize the currency.

However, the rupiah, which surged to a range of 7,200 to 7,500 early this week from over 9,000 last week, weakened again yesterday to the 9,000 level after news that the IMF did not approve of a CBS for Indonesia at this point in time.

"So we concluded with the President that the markets are talking loudly whether CBS is good or bad. And the consensus is that it must be very good because the rupiah has gotten stronger on news that the CBS is coming," Hanke noted.

Hanke refused to say when the government would officially adopt the system. He promised government transparency and that it would fully inform the public on the details of the system's implementation.

"The President suggested that I hold a press conference daily as we want as much transparency as possible on the movement forward," Hanke said.

The economist cited the CBS' success story in several countries including Argentina, Lithuania, Hong Kong, Estonia and Bosnia.

"Hong Kong is one of the most competitive economies in the world and they have a currency board at a fixed exchange rate," he noted.

He described how Argentina drastically strengthened its peso in 1991 by fixing the currency to the U.S. dollar.

"It (the CBS) motivated a lot of reforms that liberalized the (Argentine) economy and increased productivity dramatically," he said.

The IMF insisted Thursday that Indonesia was not ready for a rigid currency regime, highlighting the country's political uncertainties.

IMF view

IMF First Deputy Managing Director Stanley Fischer, using uncharacteristically blunt language about political issues, noted that Indonesia's currency had been hit by suggestions that the country could select a vice president whose "devotion to new ways of doing things is limited".

He gave no names.

Fischer also said it was too soon for Indonesia to consider a currency board, an inflexible regime with a fixed exchange rate where a country only issues money when it has sufficient reserves to back it up. A central bank becomes irrelevant under the system.

"We have concluded that a lot of options need to be in place before a currency board would make sense," Fischer told a luncheon seminar in Washington. "I do not believe Indonesia is there at the moment."

Indonesia, the world's fourth most populous country, received a $10 billion loan pledge from the IMF last year as part of a $43 billion international package to help Jakarta cope with economic turmoil triggered by a currency crash.

It is the IMF's third largest loan, after a $15.5 billion advance to South Korea at the end of last year and a $12.1 billion loan to Mexico in Jan. 1995.

The package, coupled with doubts about the government's commitment to the program of economic and financial reforms underpinning the rescue deal, has done little to stabilize domestic financial markets.

The government is therefore considering the drastic alternative of a currency board, which official sources say could be ready within weeks.

Fischer said prerequisites for an Indonesian currency board included the need for adequate central bank reserves, a stronger financial system and steps to solve the country's mountain of corporate debt.

U.S. Treasury Secretary Robert Rubin, in his second comment in two days on Indonesia's currency plans, told a Senate foreign relations panel that several issues had to be sorted out before Indonesia could think about a currency board.

"For this even to be worth considering you have to have underlying conditions that will enable it to work, and I think there are enormous issues to be worked through in the Indonesian case before you can even consider doing it," he said.

Federal Reserve Chairman Alan Greenspan told the panel that a well-managed currency board could create "a number of extra useful elements of economic stabilization", but the authorities had to be totally committed to making it work.

"It is a very high value payoff product ... but it is a high potential risk product if it is not done well," he said.

"Don't construct a currency board unless you are going to make it work." (prb)