Indonesias Plan For Currency Board Must Be Ambitious

A key economic adviser to President Suharto said the currency board he envisions for Indonesia should be considerably more ambitious than those in other countries, the Washington Post reported Tuesday.

Johns Hopkins University professor Steve Hanke told the newspaper in an interview that a more ambitious currency board was essential because of the need to address weaknesses in Indonesias banking system. He did not elaborate in the story.

Hanke also said he advised Suharto to privatise the biggest, five state-owned enterprises as part of the plan. I advised the president that youve got to take the biggest five.

Otherwise, the markets will be sceptical, Hanke told the Post.Suharto said last weekend the International Monetary Fund had not helped stabilise the rupiah with its harsh reform programme, and a more broad-based effort was needed.

 

The proposed new plan has been dubbed IMF-plus because it expands on the existing arrangement under which the IMF was to provide in excess of $40 billion in return for economic reforms.

IMF-plus would include large scale privatisation of state-owned companies, a bankruptcy code, reduction and rescheduling of external debt, and the adoption of a currency board system to fix the rupiah to a single dollar rate. Firm details have only just begun to trickle out. The IMF is objecting to a currency board that would peg the Indonesian rupiah to the dollar because it felt the country was not yet ready for the move.

Hanke said Indonesia could support the peg by holding enough dollars to cover the value of all rupiah in circulation and in banks, according to the Post report. In countries such as Argentina that have currency boards, the dollar reserves held by monetary authorities tend not to be quite that large.

Hanke said Indonesia could get the money it needed for the effort from international institutions like the IMF, through lines of credit extended by private banks, and from wealthy countries such as Brunei, Indonesias wealthy neighbour.

On Tuesday, US President Bill Clintons envoy, Walter Mondale, met with Suharto and told him the US opposed quick fixes to Indonesias economic troubles in a clear reference to the currency peg idea.

He also said that Clinton felt the only way out of its economic mess was for Indonesia to fully and vigorously implement IMF reforms.