Sjahril says rupiah to remain floated

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said yesterday that the central bank has no plans to reintroduce a managed exchange rate system to arrest the rupiah's free fall against the U.S. dollar.

The central bank governor indicated that the reintroduction of a managed floating rate policy and other forms of capital control were no longer effective ways of managing the national currency.

He was dismissing earlier rumors that the central bank would be forced to reinstall a managed floating rate system after the currency came close to its historic low of Rp 17,000 to the dollar on Wednesday in defiance of high domestic interest rates.

The managed floating rate system was abandoned on August 14 last year after a costly attempt by Thailand, Malaysia, the Philippines and Singapore to protect their currencies from speculative attacks failed.

Before it was floated, movement in the rupiah's exchange rate was set within a trading band. The trading band was expanded to as wide as 12 percent in July when the rupiah started to come under speculative pressure.

The government decided to float the rupiah after the central bank lost US$1.5 billion in efforts to protect the currency between July 21 and August 13.

Sjahril also dismissed rumors that the central bank intended to impose capital controls to prevent the rupiah from sliding even further.

"We will maintain an open foreign exchange regime," he said after signing a US$1 billion trade loan agreement with Japan Exim Bank.

He said that the country exercised tight capital controls in the 1970s but still failed to stop capital outflow.

"People always find ways to send their money out of the country," he added.

He said that one way in which BI was propping up the rupiah was by providing domestic banks with the foreign exchange needed to meet their foreign obligations, including trade finance debts.

He declined to say at what exchange rate the banks were buying dollars for, but said it would be at BIs own rate, which mirrors market fluctuations.

"The rupiah improved slightly today," he said, using this as evidence of the prudence of BIs decision to help the domestic banks.

The rupiah closed at Rp 15,000 yesterday after strengthening to as high as Rp 14,200. It was trading at Rp 2,450 to the dollar in July last year.

The agreement reached at the recent Frankfurt debt talks obliges domestic banks to settle more than $1 billion in trade finance arrears owed to foreign banks before the country can participate in the agreed debt relief program.

Sjahril also said the central bank would continue to maintain its high interest rate policy to stabilize the rupiah, despite its unpopularity with the business sector and criticism from the House of Representatives. (rei)