A managed floating forex system better for RI: Economist

The Jakarta Post, Jakarta

The central bank, Bank Indonesia (BI), is better off using a managed floating exchange rate regime than a freely floating one to help control the rupiah against the U.S. dollar, an economist said.

The monetary authority has revised its forex system three times since 1970. A fixed forex system in place between 1970-1978 was followed by managed floating between 1978-1997 and then free floating since August 1997.

However, in defense of a doctoral dissertation Wednesday Erna Zetha Rahman of University of Indonesia (UI) said the central bank needed to revert back to the managed floating system in place before August 1997.

"A managed floating regime makes the country's economy grow, as it allows the central bank to supervise the rupiah and ... according push on inflation rates," Erna Zetha told the forum.

"A freely floating regime, meanwhile, makes the rupiah fluctuate, which affects the stability of the economy and may eventually hamper economic development," said Erna, who is also a member of the Indonesian Chamber of Commerce and Industry's (Kadin) economic team.

A managed floating forex system would see the introduction of a so-called intervention band to guide central bank market interventions and keep the rupiah within a desired range.

Under a free-floating system meanwhile, no band exists to guide interventions.

In 1997, when the crisis struck, the central bank had to change its forex system as the rupiah depreciated to a level surpassing the upper limit of the intervention band.

Erna expressed her opinion that a free-floating forex regime was risky and prone to social, economic and political turmoil, both external and internal.

"The rupiah is becoming too easily influenced by market sentiments, creating uncertainty for investors in the production sector and eventually hindering economic growth."

However, Erna also said that while a de jure free-floating regime had been in place since August 1997 -- as mandated by the International Monetary Fund (IMF) -- the country has in fact had a managed-floating regime since the third quarter of 2002.

According to Erna, since the silent adoption of the managed regime by the central bank, the country's economy had improved year-by-year with relatively low inflation rates, except in 2005 when the government raised fuel prices.

The country's inflation rate reached 17.11 percent in 2005 from 6.4 percent in the previous year. However, it dropped to 6.6 percent in 2006 and to 6.59 percent last year. (adt)