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.