Will Indonesia adopt a fixed-rate system?

Will Indonesia adopt a fixed-rate system?

The current lead of the Indonesian Democratic Party of
Struggle (PDI Perjuangan) in collecting electoral votes has
raised questions whether the coming government will adopt a
fixed-rate foreign exchange system. Economist Kwik Kian Gie, who
is also deputy chairman of the party, is trying to explain his
position on the foreign exchange issue.

JAKARTA (JP): Several parties among domestic and international
societies have reacted unfavorably toward my long proposal for
Indonesia to readopt a fixed-rate foreign exchange system in a
bid to revive economic activities.

Questions related to that proposal were raised particularly
after media reports on a seminar organized by the Strategic
Intelligence on April 8, 1999, and it gave an impression that I
was strongly insisting on the proposal in spite of the opposition
from the International Monetary Fund (IMF), with which the
Indonesian government has signed a bailout agreement involving
aid worth more than US$40 billion. The proposal, therefore, needs
further explanation for clarification.

After the start of the Indonesian economic crisis in the
middle of 1997, the rupiah's value depreciated sharply to its
lowest level of Rp 17,000 per U.S. dollar in 1998 before rising
back to about Rp 7,800 at present. The sharp depreciation has now
caused the prices of industrial products, whose production
depends heavily on imports, to rise by 2.5 or 2.8 times.
Meanwhile, affected by a lower purchasing power, most of
Indonesian society is unable to buy such products and many
factories were forced to stop operations for about two years.

The recovery of the rupiah's value has been partly caused by
the implementation of IMF-approved economic policies, under which
some economic infrastructures were readjusted. But the current
value of the dollar is still too high for the reinvigoration of
business activities.

Now that all economic indicators have shown a bottoming out of
the economy, and while social and political conditions are
approaching stability, it is high time for the reimposition of a
fixed-rate foreign exchange system with the rupiah's conversion
rate set on the basis of the current purchasing power parity.

I know that the reimposition of the system may distort the
mechanism of the foreign exchange market. But the current
conditions can be used as momentum to "force" the dollar's value
to decline to a level that can support the reinvigoration of
business activities. The level of the rupiah's value, however,
must be determined after careful calculation to avoid being
overvalued. At the same time, the economic infrastructures should
be mended to support the stability of the rupiah's value at that
level.

I fully understand that the proposed fixed-rate system cannot
be reimplemented without the consent of the IMF, the World Bank
and the Asian Development Bank (ADB). I, therefore, will not
insist on the readoption of the system in confrontation with the
IMF, by saying, "Go to hell" to the fund. But what I mean is that
we have to continuously struggle for it, for the revival of many
industrial facilities, at discussions held with the IMF every
three months to review the progress of Indonesia's program on
economic recovery.

Without getting approval from the IMF, we will never have any
funds for the financing of economic activities because the
government, due to the serious economic deterioration, will never
be able to generate adequate revenue for routine programs,
including the payment of salaries to civil servants and members
of the national Military (TNI). Without IMF's consent, Indonesia
will also find difficulties in generating bilateral loans from
donor countries under bilateral arrangements, such as Singapore
and Japan under the Miyazawa Plan.

For those who do not agree with the refixing of the rupiah's
value, they should also understand that the IMF's theory -- that
the rupiah's value will improve soon after the economic
infrastructures are restructured -- proves to be moving too
slowly.

But it should be understood that the proposed fixed-rate
system is different from a currency board system (CBS), which was
proposed for implementation in Indonesia in early 1998. The
proposed system was actually implemented in Indonesia for 25
years before the introduction of a managed float system with an
intervention band.

The proposed fixed-rate system is also not meant to be
implemented permanently. As soon as the rupiah's conversion rate
is stable, supported by economic and political stability, the
currency exchange system can be set free again and be allowed to
develop freely in line with the market mechanism.

I acknowledge that the reimposition of the fixed-rate system
may have a risk; there would be a rush on dollars. But the
current free exchange rate system has produced a real risk -- the
cessation of many industrial factories.

So, we have to be realistic in trying to reduce the economic
burdens of people and I will not strongly insist on my proposal
but I do hope that the post-elections government will have a high
sense of dignity to work hard so that the country's economy will
no longer depend so comprehensively and so heavily on foreign
parties.

Once I said at a seminar that we prefer to be controlled by
foreigners who can cooperate and be influenced rather than being
controlled by Indonesian economic criminals. But above all, we
prefer to be controlled by Indonesian citizens who uphold
morality and abide by the rules.

Many small and medium companies, which manage businesses
conservatively by keeping debt-equity ratios low, have proven
strength against the current economic crisis because they avoid
being dependent on facilities provided by the government through
corrupt, collusive and nepotistic practices.