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.