Jakarta Unveils Fresh Bank Regulations

Indonesia announced fresh regulations on Tuesday to reform its unwieldy banking sector but said a proposal to peg its battered rupiah currency to a fixed exchange rate was still under study.

Bank Indonesia Governor Sudradjad Djiwandono said no decision had been taken on a proposal to implement a currency board system, which would peg the rupiah to a fixed rate.

Sources close to senior government officials have said the proposal would peg the rupiah at 5,500 to the dollar -- from current rates of about 7,500 -- and help in containing rising social unrest in the nation of 200 million people.

 

The precipitous fall in the rupiah to a historic low of 17,000 to the dollar last month from about 2,400 six months ago has led to steep inflation and the prospect of massive unemployment.

Rioters have looted and burned shops in several towns in the past few weeks as prices of rice, cooking oil and milk have risen and analysts have warned that more unrest could be in store.

Djiwandono, speaking to reporters after a meeting of top policy-makers which was chaired by President Suharto, also announced that minimum paid-up capital requirements for domestic banks would be raised to one trillion rupiah ($125 million) with effect from the end of 1998.

This will rise to two trillion rupiah by the end of 1999 and three trillion rupiah by the year 2003, he said. The current minimum is pegged at 150 billion rupiah.

"The decision is expected to accelerate mergers among banks so our banking industry can be stronger with a bigger capital base," Djiwandono said.

Indonesia has some 215 banks, many of them inefficient, and banking analysts said the number could drop to about 10 after the new regulations are fully implemented.

But the move had little impact on the currency market, which appeared transfixed by the possibility of the currency board system.

"The risk of unrest is running so high now that it seems the idea of a currency board is primarily being approached as a political necessity," the I.D.E.A. consultancy said in a commentary.

"In short, Jakarta is interested in any policy that fixes the currency and helps remove some of the risk of rising consumer prices without fully acknowledging what it means for the macro-economy over the medium-term to run a strict currency board."