Ramped CBS

Ramped CBS

Having been a resident of Indonesia for the last 17 years, I
would like to offer my suggestions with respect to the proposed
Currency Board System (CBS) to establish a fixed exchange rate of
Rp 5,000 to the U.S. dollar.

It appears that most foreign governments and institutions such
as the United States, Australia, Germany, Singapore and the
International Monetary Fund etc. have reacted extremely
negatively to the proposed CBS. They predict it will take from
five to 10 times the $17 billion that Indonesia has in its
foreign reserves to support the Rp 5,000/U.S. dollar level and
provide it with any chance of success. However, Indonesia appears
to have little other viable alternative in order to stabilize the
monetary system and restore confidence in the rupiah to avoid the
obvious internal ramifications.

What I doesn't understand is why these so-called big
international and experienced organizations and quasi-government
institutions are reacting in such a polarized fashion, in that
they are 100 percent opposed to the proposed CBS, instead of
suggesting the following obvious compromise, that I have named
the "ramped CBS."

What I mean by a ramped CBS is that the fixed exchange rate
would start at a higher level, say for example between Rp 8,000
and Rp 9,000 per U.S. dollar. This would allow hard-pressed
companies and individuals to satisfy their immediate short-term
U.S. dollar or other foreign currency requirements.

After s short stabilizing period, up to a month, then the
"ramped CBS" would lower the fixed rate to the Rp 7,000-Rp 8,000
level in fixed predetermined steps and eventually approach, if
possible, the desired Rp 5,000/U.S. dollar level.

This would not only test the viability of the new CBS system
and Indonesia's liquidity but prevent a panic-induced run on the
rupiah, as a result of companies and individuals attempting to
try to convert as much of their available rupiah at the Rp
5,000/U.S. dollar level, causing the proposed CBS system to fail.

In addition, the proposed CBS at the Rp 5,000 level would
require all banks and legal money changers to quote a similar
exchange rate, but due to the demand to sell the rupiah coupled
with the fact that the banks would definitely not have sufficient
foreign cash, it would fuel a run on the rupiah. This would give
rise to a new black market in currency exchange to meet the
demand, however at much higher rates -- in the range of Rp 10,000
to Rp 20,000 per U.S. dollar -- and thereby further destabilizing
confidence in the rupiah.

The "ramped CBS" would have a stabilizing effect on the rupiah
by encouraging individuals to hold on to their rupiah as long as
possible knowing it would benefit them more the longer they could
hold on before converting to a foreign currency. This would
instill confidence in the rupiah and further encourage the
majority of individuals to keep their rupiah, in itself the
backbone of any program to restore confidence in a currency,
which caused the problem in the first place.

It appears that the polarized positions and reactions of these
foreign parties acting in direct opposition to the Indonesian
government by failing to suggest any compromise, similar to the
above, to the proposed CBS especially in view of the upcoming
elections and severe economic conditions. The current position of
these foreign parties further increases the Indonesian reaction
that there possibly exists another, hidden or negative, agenda.

WALTER H. MANNING

Jakarta