Restore managed exchange rate system: Mar'ie

JAKARTA (JP): Former minister of finance Mar'ie Muhammad called on the government to reintroduce a managed exchange rate system to prevent further fall in the value of the battered rupiah yesterday.

"The government needs to take decisive action to prevent the situation from deteriorating further by, for example, reintroducing a managed exchange rate system," Mar'ie said in a discussion on the economy held by the Indonesian Engineers Association and the Indonesian Economic Graduates Association.

The other alternative, according to the former finance minister, is to control the flows of foreign exchange held by Indonesian exporters.

Mar'ie was finance minister when the government abandoned a managed exchange rate system on Aug. 14 and fully floated the rupiah one month after the monetary crisis first hit the country.

"As a matter of fact, even then I preferred a managed exchange rate system to a fully floating system, but we had no choice (but to adopt a floating system) because all our neighboring countries had taken that step," Mar'ie said.

The rupiah, which traded at around Rp 2,450 against the U.S. dollar at the end of June last year, started to fall in early July following devaluations of the Thai baht and the Philippine peso.

Bank Indonesia widened the rupiah trading band to 12 percent from 8 percent to curb currency speculation before abandoning the system altogether after the move failed in its objectives.

"We lacked the foreign exchange reserves necessary to intervene in the market to defend the value of the rupiah," he said, adding that the government was spending about US$500 million every day in its efforts to prop up the currency.

The rupiah broke through Rp 17,000 barrier in January but then strengthen to around RP 10,000 against the dollar in the following months before once again falling back toward its all time low two weeks ago.

Mar'ie said that reintroducing a managed exchange rate was not impossible, provided the idea gained the support of the International Monetary Fund (IMF).

If the IMF, which last year arranged a US$43 billion bailout fund to lift Indonesia out of the crisis, permitted the country to use a large part of these funds strengthen Bank Indonesia's foreign reserves, then the idea would be feasible, he argued.

The government could also strengthen the currency by applying controls to the proceeds from exports, he said.

Under his suggestion exporters would be obliged to carry out transactions through specially appointed banks so that the government could control the export revenues.

"I think such a measure would be fair given that the government also provides foreign exchange assistance to importers," Mar'ie said.

Bank Indonesia Governor Sjahril Sabirin said earlier yesterday that the central bank had no plans to reintroduce a managed exchange rate and other forms of capital control to prevent further loss of value in the rupiah against the U.S. dollar

The central bank governor said that the reintroduction of a managed floating rate policy and other forms of capital control would not be effective ways of managing the national currency.

"We will maintain an open foreign exchange regime," he said, adding that Bank Indonesia was propping up the rupiah by providing domestic banks with the foreign exchange required to their overseas obligations, including trade finance debts. (jsk)