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)