Two-tier forex trading proposed to stabilize rupiah

Two-tier forex trading proposed to stabilize rupiah

JAKARTA (JP): The Indonesian Institute of Sciences (LIPI) has
called on the government to adopt a two-tier foreign exchange
trading system to prevent a further drop in the value of the
rupiah against the U.S. dollar.

LIPI's economist Wijaya Adi said here yesterday that the two-
tier trading system, under which a lower exchange rate would be
offered to importers, was essential to stabilize the Indonesian
currency.

"The IMF economic reform program can't guarantee that the
rupiah will stabilize, then appreciate in value in the short
term. During these abnormal times we must come up with emergency
measures to stabilize the rupiah because people cannot endure the
crisis for much longer," he told the media yesterday.

He said that under the proposed trading system, importers
would get a special conversion rate when buying U.S. dollars
while other forex trading would be based on the market exchange
rate.

Exporters should be required to deposit their foreign exchange
receipts in Bank Indonesia or appointed commercial banks to
ensure that the country has foreign exchange reserves large
enough to support the dual rate program, Wijaya said.

He explained that the rupiah would gradually stabilize under
the two-tier exchange rate system by discouraging speculation on
the currency. Importers, he said, would have a guaranteed supply
of cheap dollars and the government would have large foreign
exchange reserves with which to intervene in the currency market
if the need arose.

Wijaya said that in July, according to his calculations, the
real value of rupiah should have been slightly above Rp 3,993 to
the dollar.

"The rupiah should gradually approach this level and the most
effective way to bring this about is through a dual exchange rate
system," he said.

The rupiah was hovering at around Rp 14,000 against the dollar
last month, compared to its pre-crisis level of Rp 2,450 in July
1997.

Wijaya added, however, that although a dual exchange rate was
a good idea, implementing it may not be easy because of the
bureaucracy's poor performance and bad "habits."

Political stability and a clean government is an absolute pre-
condition for a dual exchange rate system, he pointed out.

"No economic policy is effective without political stability,"
he said, adding that a clean government was needed to ensure that
subsidized dollars were only used for imports and that exporters
did not smuggle their produce out of the country to avoid
surrendering their dollar earnings to the government.

He said the government must also appoint a select group of
strong and healthy banks to work under the scheme to ensure that
local letters of credit held by exporters are accepted by
overseas banks.

He added that the government would also have to convince the
IMF that a two-tier exchange rate system was capable of
strengthening and stabilizing the rupiah.

"The government must dare to fight the IMF because its program
of reform does not guarantee a stable rupiah," Wijaya said.

However, he did not believe the government should press ahead
without first putting these prerequisites in place, saying:
"Without all these conditions in place it is better not to
introduce a two-tier system because it will only create bigger
problems."

He stressed that the two-tier system was only a temporary
measure and that it must be abandoned as soon as the rupiah
stabilizes at a desirable level.

"I admit that this dual system is against a free market
concept, but these abnormal times leave us with a very limited
number of options," he said.

He said that if the rupiah appreciated and stabilized,
inflation and interest rates would decline correspondingly and
this would attract new investment and create job opportunities.

Several local experts and businessmen have also proposed a
two-tier system as a quick way to lift and stabilize the ailing
rupiah.

Carunia M. Firdausy, a director in LIPI's economic research
division, said a report on the institute's research into a two-
tier exchange rate had been sent to President B.J. Habibie and
the Supreme Advisory Council (DPA). (rei)