Tracking capital flows

Starting this month banks and their customers, including foreigners holding stay permits and Indonesians residing overseas, are required to prepare more detailed reports on all foreign exchange (forex) transactions in excess of US$10,000. They have to disclose the identities of the remitter and recipient of these funds, the type and purpose of each transaction, and the financial relationship of the transactors.

However annoyed bank customers might be with the additional paperwork, they can rest assured that the new ruling has nothing to do with any plan to impose forex control and that all reports will be kept confidential.

Such documentation is necessary as banks are now required to keep detailed accounts of all forex transactions they conclude for themselves or on behalf of their customers and submit them in monthly reports to Bank Indonesia (central bank) beginning April 1. A technical mechanism is still being prepared for compulsory reporting by nonbanking financial institutions, which typically accounts for only less than 20 percent of total forex transactions.

The new procedure implements Law No. 24/1999 and is designed to keep Bank Indonesia apprised of capital flows of foreign exchange to and from the country and will enable it to adopt a more effective monetary policy. The compulsory reporting on forex deals was prompted by the financial crisis that hit the country two years ago.

When a massive run hit the rupiah immediately after the currency's free floating in mid-August 1997, Indonesia's central bank was completely in the dark when it came to understanding just how much the country's need of foreign exchange was. More shockingly, it was unable to track foreign exchange flows in and out of the country, nor was it able to calculate the extent of private companies' foreign debts.

Only after speculative attacks on the rupiah escalated, setting off a feverish stampede of hard currency out of the country, did Bank Indonesia begin taking stock of just how much the private sector really owed to foreign creditors. When the final count was completed in mid-1998, the conclusion was a shocking one: companies and banks owed a staggering total of more than $75 billion, mostly in short-term debts.

The central bank was never able to estimate with any real accuracy just how much capital flew out of Indonesia at the peak of the currency crisis, this being in the first quarter of 1998 when the rupiah fell as low as Rp 17,000 to the dollar. Private estimates put the capital flight at between $18 billion and $30 billion.

Commendably, the government, in spite of the devastating impact of the rupiah's free fall, did not resort to clamping down, as Malaysia did, by instituting forex control to cope with the panic. By drawing an important lesson from the situation, the government drafted a bill on reporting forex transactions which was enacted by the House of Representatives last April.

Though the reporting system will impose additional work on banks it will not, however, cause excessive mountains of paperwork, for only transactions worth over $10,000 will have to be accounted for in detail. Transactions valued up to $10,000 can be reported in a lump sum.

Surely up-to-date reporting will provide the central bank with accurate, comprehensive and timely data on forex deals, enabling it to have a more comprehensive understanding of its external balance and international investment, a prerequisite for devising effective monetary policies.

The question now is what will make the new law more effective than similar regulations in the past. Since the early 1980s, private companies, including banks, have also been required to report forex deals, notably foreign borrowings to Bank Indonesia; but the end result, apparent to all in late 1997, was that the central bank remained completely in the dark about capital flows in and out of the country.

Surely the condition now is different under new regulatory environment and exchange rate policy. The penalties stipulated in the law -- which range from fines amounting to Rp 100 million ($13,300) for nonreporting and Rp 5 million a day for any delay in reporting, to suspension of business licenses for six consecutive months of nonreporting -- would go a long way in forcing banks to make monthly reports. The free floating of the rupiah makes the monitoring of forex flows an urgent necessity so that the central bank can conduct effective management of funds.

Also most important is that different from the past when Bank Indonesia was often made powerless in dealing with politically well-connected banks and companies, it is now vested with strong autonomy by virtue of the new Central Bank Act enacted last May and is therefore more powerful to enforce laws on monetary affairs.