Reasonable rupiah exchange rate

Reasonable rupiah exchange rate

From Suara Karya

Currently, monetary officials and economic observers are busy
talking about the drastic strengthening of the rupiah over the
past few weeks. Since president Abdurrahman Wahid's descent, the
rupiah became stronger by about 2,200 points, a praiseworthy
achievement, which reflects the market's positive response toward
the new government.

But actually what is the reasonable exchange rate of the
rupiah against the U.S. dollar? Almost all the views of officials
and observers reported in newspapers never touch on the
"devaluation theory", which weakened the rupiah year by year
during the New Order regime.

In October 1978, then in 1982 and lastly in 1986, the
government devalued the rupiah by between 45 percent and 55
percent. But in 1990, when such devaluation should have been
executed again, the Monetary Council headed by Prof. Dr. Sumarlin
did not do so, because routine devaluation was considered to be
unpopular. Instead they felt compelled to impose a Tight Money
Policy (TMP). The media made a joke of the abbreviation TMP,
calling it, Taman Makam Pengusaha (The Graveyard of Businessmen).

During that time Kredit Lunak Bank Indonesia (Bank Indonesia's
Soft Loans) was discontinued and as banks no longer provided soft
loans for industries a huge number of businesses collapsed. The
government kept on trying to maintain the exchange rate of rupiah
at around Rp 2,000 per U.S. dollar until the end of 1997, when it
was rendered incapable of subsidizing any further and the
exchange rate skyrocketed to over Rp 10,000.

The actual inflation rate during the New Order regime was
approximately 15 percent, which was always manipulated by the
then government to a one digit figure (below nine percent).
Finally today we have to be penalized for the above continuous
subsidies in the form of swelling loans.

In my calculation the reasonable exchange rate of the rupiah
against the U.S. dollar today should be Rp 1,100 multiplied by
1.5 to the power of 6, which equals Rp 8,350. The figure 1,100
was the exchange rate in 1986 and the power of 6 is based on the
government's routine devaluation every three years, which had
been discontinued since 1986 and was actually already missing 5
instances of devaluation plus 1 (an unroutine factor). The figure
1.5 is 100 percent plus the average devaluation rate at 50
percent.

I conveyed this theory to Mr. Budiono (former chairman of the
national development planning board) in October, 1997, when the
U.S. dollar started to creep upward, but as I was not an expert
on the economy, it was brushed aside. However, today's reality is
not far from this theory.

Exporters need not worry, because the exchange rate of the
rupiah will never reach Rp 7,000, although politicians have kept
quiet. The exchange rate of the rupiah will move to the range of
Rp 8,000 - Rp 8,500, but the most important thing is to have a
stable rupiah for a long time to come.

This stability is based on the government's capability to
create good governance, which is free from corruption so that the
annual inflation rate can be kept down to 5 percent.

ZAINUDDIN ZAINI

Jakarta