VP Floats Idea on Capital Control to Safeguard Rupiah

As risks associated with volatility in the flow of capital are poised to expand, Vice President Jusuf Kalla has floated an idea to impose capital control in order to stem the outflow of foreign-denominated assets as well as to repatriate Indonesian wealth parked overseas. 

Within the next couple of weeks, according to Kalla, a team at the Vice President’s Office will review all those related regulations and laws that can be revised so as to help pave the way for the accumulation of foreign-exchange reserves.

“Our law and regulations with regard to capital flow are too liberal and because of this, the proceeds from our exports are not stashed here. Much of these funds have been and continue to be deposited in Singapore. To make matters worse, many of these companies also have their headquarters in the city state.

“They do not keep any export proceeds in Indonesia and they don’t pay taxes with us. When there is a tremor in the global economy, our rupiah is vulnerable to severe impact because our [foreign exchange] reserves are too small,” said Kalla in a recent discussion. 

In order to impose control on capital, according to Kalla, he is lining up to revise several laws including but not limited to the Law on the Central Bank, the Law on Foreign Exchange Flow and Currencies and the Law on Trade. 

Among the forms of capital control Kalla continues to mull over are a foreign exchange control that will prevent or limit the buying and selling of rupiah and a mandatory repatriation of export proceeds.

As the greenback strengthened against other global currencies due to optimism surrounding the US Federal Reserve interest rate increase, the rupiah declined 9.2 percent against the US dollar this year, according to data compiled by Bloomberg. The rupiah currently hovers above Rp 13,500 per dollar. 

In comparison, Malaysia’s ringgit tumbled 19 percent against the greenback this year, Asia’s worst performer, while the Philippine peso fell 5.3 percent and Thailand’s baht weakened 8.8 percent, according to Bloomberg.

As Bank Indonesia (BI) struggled to prevent the rupiah from its steep fall, the central bank drained much of its foreign exchange reserves. At the end of November, BI’s reserves stood at US$100.2 billion in comparison to $111.1 in the same period of 2014.

BI governor Agus Martowardojo has said that the rupiah may remain under pressure next year as he forecasts that demand for imports will continue to outpace that of exports. 

“It’s supply and demand. As long as we import more than we export, don’t expect the rupiah to strengthen,” he said.

Source: www.thejakartapost.com, 28/12/15
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