Indonesian plan to peg rupiah to the dollar `premature'

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The Independent Online
Plans by Indonesia to establish a currency board and peg the upiah to the dollar in an effort to bring stability to its troubled economy received a double blow yesterday after the International Fund and the US government said the move was premature.

Michel Camdessus, the IMF managing director, said it was too soon for Indonesia to adopt a currency board. He said that he was of "the strong view" that the time for a pegged currency in Indonesia had not yet come, because "a number of preconditions need to be satisfied". Mr Camdessus pointed to the need for adequate foreign exchange reserves and "more progress in the rehabilitation of the banking system".

Speaking at the Bretton Woods Committee's annual meeting, he said that without the necessary preconditions, there was a chance the currency board would fail, which would hurt the country's prospects for an economic recovery.

"The failure of a currency board would completely undermine credibility and policy-making and seriously damage the country's growth prospects," Mr Camdessus said.

Meanwhile, Lawrence Summers, the US Deputy Treasury Secretary, backed the IMF's stance on a proposed currency board, saying there was no "quick fix" to the country's economic problems.

Asked if Washington agreed with the IMF on the issue, Mr Summers told reporters, "I don't have anything to add. The United States is part of the (IMF) executive board."

The remarks come as Indonesia's President Suharto appeared to be pressing ahead with the controversial system as fresh rioting was reported in three Java towns over rising prices.

The argument sets the stage for a showdown with the IMF that economists warn could scuttle the country's $40bn (pounds 25bn) aid package.

Even before the tough talking, the rupiah had fallen as much as 24 per cent yesterday on concern the opposition to the peg would scuttle the plan. The rupiah fell as low as 9,600 to the US dollar, traders said, from 7,300 yesterday. The fall dragged other south-east Asian currencies lower.

The President last month signed a new agreement with the IMF to push forward with sweeping economic reforms in return for a $43bn bail-out package orchestrated by the fund. The currency rebounded after a key adviser on the currency plan said Suharto agreed to go head with the proposal in a meeting today. The rupiah traded recently at 8,200.

Separately, Indonesia's central bank governor called on developed countries to do more to help Indonesia, or take the risk of the country's problems spreading beyond Asia.

The call for help comes amid more reports of riots targeting Chinese shop owners as Indonesians scramble to find food and basic sanitary provisions. Indonesia is confronted with rampant inflation, surging unemployment and an economy that is expected to contract for the first time in almost 30 years.