BI regulates bigger forex purchases to steady rupiah

The Jakarta Post , Jakarta | Thu, 11/13/2008 10:39 AM | Business

As the rupiah declines, the central bank will limit the purchase of foreign currencies above US$100,000 to those who can provide information to justify their transactions.

Through a new regulation to be effective starting Thursday, Bank Indonesia expects this policy to help balance demand and supply in the forex market, reduce extreme pressure on the rupiah and minimize forex purchases for speculative purposes, governor Boediono said in a statement Wednesday.

"The regulation is based on the free foreign exchange system that Indonesia now has, in which every citizen is free to own and use foreign currencies, as stipulated on the Law No. 24/1999 on foreign exchange flows and the exchange rate system," Boediono said.

"This is not a foreign exchange control policy or capital control mechanism that limits capital flows between countries,"

Individual customers and registered Indonesian and foreign companies are still allowed to freely purchase foreign currencies through spot, forward, or derivative transactions, BI said.

However, Indonesian citizens or firms wanting to purchase more than $100,000 in foreign currencies need to provide evidence of justifying transactions, such as invoices used to import goods or pay debts.

Meanwhile, foreign parties can only purchase amounts above $100,000 through spot transactions.

The regulation is expected to limit speculative purchases of currencies. With the regulation in place, BI expects that banks should be able to detect when customers purchase dollars for speculative purposes.

Analyst Farial Anwar has said that the fall of the rupiah was caused by the free foreign exchange system adopted by Indonesia.

With capital control, Farial said, the government could more easily manage the flow of short-term funds, or hot money, in and out of Indonesia.

"Hot money is harder to monitor and control and it enters only the financial sector, not the real sector. It makes us black and blue, while only 2 million people out of our 220 million population are engaging in the financial sector.

"If the rupiah stays at the current level for a long time, it will affect state financing and people will suffer," he said.

On Wednesday, the rupiah fell 1.6 percent to 11,485 per dollar as of 4:10 p.m. in Jakarta. At one point the currency reached 11,700 Wednesday, approaching the 11,900 it reached on Oct. 28, which was the lowest since 2001.

"Investors are switching from the capital market to the foreign exchange market to compensate for their losses, thus the dollar strengthens. Investors say it's a safe haven," Farial said.

According to Bloomberg, the rupiah has weakened by 14 percent in the past month, making it the worst performer among Asia's 10 most traded currencies.

-- Aditya Suharmoko

Source : www.thejakartapost.com