RI might link rupiah to basket of currencies

RI might link rupiah to basket of currencies

TOKYO (Agencies): Indonesia is considering linking its struggling rupiah to a basket of currencies under a band system, Vice President B.J. Habibie told a senior Japanese businessman yesterday.

"The currency basket system can be considered" as an option, Habibie told a meeting of the Federation of Economic Organizations, or Keidanren, on the second day of his four-day visit here.

"Indonesia will strive for the stabilization of the macroeconomy and tighter bank supervision," a Keidanren spokesman quoted him as saying.

His words will add fuel to the row which erupted when Jakarta said it was considering pegging the rupiah to the dollar. That provoked angry responses from the United States, Europe and the International Monetary Fund.

Jakarta had wanted to peg the rupiah at between 5,000 and 6,000 to the dollar to stabilize the currency, whose 70 percent fall since mid-1997 has wrecked the Indonesian economy.

Foreign exchange reserves at central Bank Indonesia fell from more than $21 billion at the end of 1997 to $16.3 billion at the end of last month.

Many analysts say such weak reserves are insufficient to support a fixed exchange rate.

In Jakarta, BI Governor Sjahril Sabirin said yesterday that the government had yet to decide the possible reintroduction of the currency basket system, in which the rupiah would be traded within a certain band.

"We're still discussing it," he told journalists yesterday following a monetary meeting with Finance Minister Fuad Bawazier and other senior officials of the ministry.

The South China Morning Post also quoted Sjahril Wedneday: "There has been a discussion about a currency board. There may be some alternatives. One of those alternatives, perhaps is going back to the band system."

The currency board system, which would pegged the rupiah at a fixed rate to a foreign currency, had been informally proposed by the government in February but was strongly rejected by many including the IMF and Indonesia's major donor countries.

Sjahril said a return to the former band system, abandoned last August, may start with a wide band progressively narrowing towards a free market level.

"It is not to say that if we go back to the old band system we will say (it) is now 5,000 to 6,000 rupiah. It should not be that way," he said.

"The approach may be to raise the rate little by little gradually to a stronger level," he said.

Alternatively, the central bank could set what it considered a realistic narrower bank, the Hongkong newspaper said.

In both cases the central bank would then move towards shifting the band lower as Indonesia's economic reforms progress and sentiments strengthen, it said.

"Either may be workable," he said.

"If, say, the agreement with the IMF is reached and capital starts to flow in and foreign exchange reserves are stronger, that could strengthen the rupiah gradually," he said.

"If the rupiah strengthens to a certain level (against the U.S. dollar), we may revise the band again... if it gets stronger to 7,000 for example, then we may see whether 5,000 is achievable," he said.

Sabirin told the Post he would not rule out intervention using the country's foreign reserves to aid the process.

Following a devaluation of the baht in July, Bank Indonesia widened its rupiah trading band from eight percent to 12 percent on July 8. But as the rupiah continues to be under attack the central bank abolished its managed exchange rate system on August 14.