RI needs capital account control: Analysts

RI needs capital account control: Analysts

TOKYO (Reuters): Jakarta needs to control the nation's capital account more strictly to help stabilize the rupiah and facilitate the implementation of its structural reform plans, analysts in Tokyo said.

"If the rupiah stays around the current 10,000 to the dollar, most of the companies relying on imported goods could soon go out of business," said Norio Mihira, an economist at the Institute of Developing Economies.

Analysts said what Jakarta urgently needs is to stabilize the rupiah by putting some controls on its capital flows.

C.H. Kwan, a senior economist at Nomura Research Institute, said: "It was a miracle nothing had happened to Indonesia during more than 20 years of free capital flows."

A developing country whose financial sector is weak should not hurry to liberalize capital account transactions at too early a stage, he said.

A senior analyst at Bank of Tokyo-Mitsubishi who shared that view said: "Having fully liberated capital accounts is not a viable option for many emerging economies such as Indonesia."

Kwan said that one possible device to help calm the frenzied movements of capital would be that proposed by economist James Tobin to put a small tax on foreign-exchange transactions.

A "Tobin tax" would make short-term speculation more costly, but have a limited impact on long-term and direct investment, Kwan said.

Radius Prawiro, appointed by President Soeharto to oversee the country's foreign-debt crisis, met officials of major Japanese creditor banks in Tokyo on Monday and sought support for the economic reform program.

In Jakarta on the same day, Indonesia imposed growth ceilings on foreign exchange deposits, foreign exchange non-trade-related liabilities and foreign exchange trade-related liabilities, which would help Jakarta control its capital account.

Soeharto on Tuesday pointed out the importance of monitoring private foreign debt to stabilize the rupiah.

In late January, Jakarta proposed a temporary freeze on corporate debt service payments and declared it would adopt new servicing measures and reform its banking sector.

Analysts and creditors in Tokyo said Jakarta needs stricter regulations on capital flows.

As in the case of most crisis-hit emerging Asian economies, Indonesia's capital account, with little official control, initially prompted a massive inflow of foreign short-term speculative capital, they said.

The recent exodus of that capital and the subsequent crash of their currencies cost not just the crisis-hit nations, but the global economy, a fortune, they said.

Some analysts said Jakarta could introduce a currency board, through which Hong Kong controls its capital account, but others were dubious of its feasibility.

Indonesia's economy is much larger than Hong Kong's and Jakarta may not have sufficient foreign capital to back up domestic circulation of the rupiah, one monetary analyst said.

Traditional ways of managing a foreign exchange rate may be difficult to apply to Indonesia, at least until Jakarta's political risk eases and it implements measures to monitor foreign debt held by the private sector, the analyst added.