Temporary freeze of forward deals urged

JAKARTA (JP): The Econit Advisory Group is urging the government to gradually ease the tight monetary policy and to temporarily freeze foreign exchange forward transactions as the liquidity crisis is overkilling the economy.

The economic research institute said over the weekend that the government should cooperate with the Singapore monetary authorities in closely monitoring capital outflows through foreign banks here.

"Bank Indonesia and the tax directorate general should audit the profits gained by banks and big companies from foreign exchange transactions," Econit's Managing Director Rizal Ramli said over the weekend.

"These measures are needed to allow the monetary authorities to ease the credit crunch without setting off another wave of speculative attacks on the rupiah," Ramli added.

According to him, the 15 largest business conglomerates in the country should also be coerced to refrain from foreign exchange transactions until the currency crisis dies down.

"The latest developments in the foreign exchange market clearly show that the tighter money policy is not effective for stabilizing the rupiah rate," he pointed out.

"The current measures could have worked back in the 1970s when the government's role was very dominant. But our economic structure has significantly changed now, whereby it is the private sector that plays the leading role in the economy," Ramli noted.

The government's decision to hike the interest rate and drain the rupiah liquidity was an "over kill", as it worsened the currency problems and might cause further damages to the economy, he said.

"We believe that Finance Minister Mar'ie Muhammad and the central bank's governor, Soedradjad Djiwandono, are both men of reason, integrity and intelligence. But the problem we are facing now needs a new approach," he said.

Calling the current measure a "pride-driven policy" rather than a "rationale-driven" one, Rizal urged the monetary authorities to direct its policy to the improvement of national welfare and not simply to the strengthening of the financial position.

The rupiah has been under attack in the past two months, dropping by nearly 20 percent against the U.S. dollar after the government floated it on Aug. 19.

The rupiah recovered briefly after the central bank squeezed liquidity by raising the central bank's certificate rates to as high as 30 percent for a one-month paper, stopping to discount money market securities and force state companies to convert their deposits to the central bank's papers.

However, the currency continued to fluctuate, dropping to almost the same nadir rate prevailing before the central bank imposed the credit crunch.

On Friday, the rupiah recovered to Rp 2,890 against the U.S. greenback after touching a new record low of Rp 3,070.

Rizal said the government ought to act now in order to prevent further damages to the economic fundamentals.

"The liquidity could be eased by gradually lowering the central bank's certificates (SBI) and by opening the SBI repurchasing and rediscounting of money market securities," he said.

But this eased liquidity should be coupled with a temporary freezing of foreign exchange transactions to prevent speculation, he added.

He said the government must audit the profits raked in by banks and companies from foreign exchange deals and monitor foreign exchange flows overseas through foreign banks operating here.

The government also needs to urge the country's top 15 conglomerates to refrain from currency speculation, as many of the speculators were domestic players, he said.

"I could name at least four local big players in the exchange market," he said, but he declined to give the names.

Rizal divided the current crisis into two phases, which he named the Patpong Effect and the Monas Effect.

The Patpong Effect, named after the famous nightspot entertainment area in Bangkok (Thailand), was the domino effect from the financial crisis in Thailand in early July.

Rizal said the attacks on the Thai baht in May and June, which exploded to the baht's devaluation in early July, affected the Indonesian rupiah as well as the currencies of other countries in the region in July.

The problem was somewhat contained and the rupiah was stabilized when the government acted promptly to widen the spread intervention, he said.

But the currency further weakened when local speculators entered dollar-buying frenzies, he added.

Problems worsened again when the government decided to drain liquidity.

He called the latter situation the Monas effect, named after the national monument in Jakarta, which was built at a time when the country was facing a dire financial condition.

"The monetary authorities seemed to be overly confident because our fundamentals are strong, but in an abnormal situation like this, psychological factors play a stronger role than fundamentals," he said.

If this dire economic condition drags on over the next two weeks, many banks and businesses would start collapsing because of cash flow crises and economic recession, he warned.

Many companies would not be able to get foreign loans, and many would call defaults because they could not afford the high interest rate, he said. (das)