Moves Initiated To Boost Rupiah

Indonesian president Suharto accused unnamed parties on Wednesday, of seeking to destabilise the economy as the government said it was preparing a framework to fix the rupiah currency to a peg.

"There are (parties) trying to engineer the fall of the rupiah to the 20,000 level (against the dollar). It does not make sense.

Therefore, we must be cautious and find ways to deal with this," Suharto said while inaugurating an industrial complex in West Java.

Finance minister Mar'ie Muhammad meanwhile told parliament that the government was preparing the groundwork to adopt a currency board system, under which the rupiah will be pegged to a fixed exchange rate and be covered by its foreign exchange reserves.

Economic analysts described the move as a last-ditch effort to rescue Indonesia and said although it might be workable, there could be a disaster if it misfired.

One analyst said the fact that the currency board was being advocated by people close to Suharto's family gave it a dubious pedigree.

Sources backing the move have said the rupiah may be pegged to around 5,500 to the dollar. The rupiah was last quoted at around 7,000 to the dollar, up sharply from last week's level of about 9,000, as dealers sold long dollar positions on news of the currency board.

The rupiah has plunged from a level of about 2,400 to the dollar last July, reaching 17,000 last month before inching back upward. The fall has made most Indonesian companies, technically bankrupt because of overseas debts, led to high inflation and raised the spectre of massive unemployment.

Analysts, commenting on an upsurge in civil unrest across the country because of the economic woes, have said the government may be forced to adopt a currency board out of political necessity.

Backers of the currency board say the fixed exchange rate will mitigate problems of inflation and debt but critics have noted that the country will not be left with an independent monetary policy.

Mar'ie said a framework for the move would be submitted to parliament within a short time. He did not elaborate. "If it works, and it's a big if, it could be the turning point," said one analyst. "If it doesn't it will be a complete disaster." (Reuters)

Others said interest rates would shoot up as players factor in political and other risks attached to Indonesia and that the economy would have to endure much pain because of this. Bruce Gale, of the Singapore-based Economic and Political Risk Consultancy, said the fact that the move emanated from people close to Suharto's family led to considerable worry. "It doesn't come from the central bank, it doesn't come from the ministry of finance, it doesn't come from any of the technocrats who have been appointed to deal with the economic crisis in Indonesia," he told Reuters Financial Television.

"Instead, it appears to come from members of the presidential family. That in itself is a worrying point -- who in effect is running Indonesia's economy." "Are we going to get certainty in economic policy as a result of the currency board or is it just another whim that may change in a few months time when the interests of the presidential family change?"

Newspaper reports have said Steve Hanke, a US economist who is advising the government on the currency board, was introduced to Suharto by members of his family and business interests linked to them. Hanke told Reuters from his office in Arlington, Virginia that he will return to Indonesia later this week and that the currency board could be up and running within three weeks. The World Bank and the International Monetary Fund, with which Indonesia has agreed on an economic reform programme in exchange for a $43 billion bail-out, have cautiously welcomed the idea.

"We're open-minded," said chief bank spokesman Mark Malloch Brown in Washington. "It's not within the World Bank's competence to comment on immediate short-term exchange rate issues. That's for the IMF." "Our point is we must look seriously at it, and obviously there will be a presumption that if the markets take it positively and it enjoys the authority of the Indonesian government it can contribute to achieving stability, a goal we all want," he added.