Indonesian Currency Board

For the first time in its 53-year history, the International Monetary Fund has become involved in what most observers are calling a "high stakes showdown" against the nation of Indonesia (Passell, 1998, C1). According to Passell's analysis, the showdown has been prompted by Indonesian president Suharto who has "his eye on his family's business and sees a currency board as a sure-fire way to prevent further declines in the nation's currency, the rupiah, and therefore in the family's fortunes" (Passell, 1998, C1). The issues are many, but one clear point of contention stands out. Indonesia wants a currency board, and the IMF has said that if the country does establish a currency board, that it will lose all further support of the IMF bailout funds.

To understand the ramifications of the current Asian financial crisis, a brief background survey is necessary. Indonesia comprises 13,500 islands, and it has been the site of many conquests by many nations. Hindu and Buddhist civilization from India reached the peoples of Indonesia nearly 2,000 years ago, taking root especially in Java. Islam spread along the maritime trade routes in the 15th century, and became predominant by the 16th century. The Dutch replaced the Portuguese as the most important European trade power in the area in the 17th century. They secured territorial control over Java by 1750. The outer islands were not finally subdued until the

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tem of fixed exchange rates. With fixed rate systems, which prevailed in developed economies until the 1970's, the government promises to exchange a foreign currency for the local currency at a preset rate. With a currency board, the government pledges to keep enough foreign currency on hand to pay off everyone who owns the currency (Passell, 1998, C4). Thus, a currency board cuts down on a nation's options. First, it cannot mint new money to pay off foreign and local debts. Second, the nation must be prepared to face a credit crunch when citizens race to trade in their own currencies for one that is more stable. The Case for a Currency Board The IMF believes that for a nation to have a successful currency board, the following conditions must be met: 1) the nation must have adequate reserves of foreign currency to meet its own currency requirements; 2) the nation must have a strong banking system that can withstand interest rate fluctuations; 3) the nation must have flexibility to adapt to competitive prices and pressures; and 4) the nation must have a strong government that can maintain stability of rule when unpopular policies cause civil unrest. How does Indonesia compare to those minimum requirements? Not very well.
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Approximate Word count = 2710
Approximate Pages = 11 (250 words per page)

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