JAKARTA, February 12: Indonesia's move to peg its rupiah currency to a fixed RATE has sharply divided economists in the region, with both camps taking strong positions for and against the idea.Finance minister Mar'IE Muhammad said on Wednesday that the government was preparing the groundwork for adopting a currency board system, under which the rupiah will be positioned at a fixed rate and covered by central bank reserves. But he gave no further details and there were no comments from the government on the subject on Thursday.
"The currency board has caused a lot of confusion," said David Chang, head of research for Trimegah Securities. "Opinions are divided and the government seems undecided if it will go through with it or not."
Protagonists say the move will stabilise the embattled rupiah at a level where Indonesian companies will be able to repay debt, control sharply rising inflation and bring the nation's battered economy back to an even keel.
"This is the last chance. It has to be supportedtotally. There is no option," Soc-Gen Crosby's head of regional research Neil Saker told a news conference in Singapore. He said the system would help stabilise the currency and thus help solve other economic problems in Indonesia.
The board would be "the least worst option to prevent hyper-inflationary meltdown," he said.
"If things go wrong with the currency board, it will go down all the way. There will be no anchor to stop it," he added.
Critics were equally adamant. They said high interest rates would be necessary to back a fixed rupiah rate, which would spell disaster for the economy. "It may be okay for some time but in the long term there's no good argument for fixing exchange rates," Commonwealth Bank of Australia managing director David Murray told reporters after delivering a speech in Melbourne.
In the short term, a fixed exchange rate could give Indonesian companies greater certainty in trying to repay foreign currency debt and also restore some price stability, he said.
"But, longterm, there's not much point," Murray said. US treasury secretary Robert Rubin said Indonesia needed to strengthen its banks and reaffirm its commitment to reforms before introducing a currency board, an inflexible system which glues the domestic currency to a convertible one and ties cash in circulation, dollar-for-dollar, to central bank reserves.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
