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