Rupiah rot troubles World Bank

The Central Bank of Indonesia is trying to stabilize the plummeting rupiah

JAKARTA, Indonesia -- The World Bank has expressed concern over the brittle Indonesian rupiah, saying it is not trading at levels that reflect economic fundamentals.

The rupiah fell through 12,000 against the dollar on Thursday.

"Certainly the fundamentals don't justify the current exchange rate," said Mark Baird, the World Bank's Country Director for Indonesia.

The statement came even as the Central Bank of Indonesia tried to underpin the unit by gradually raising interest rates, currently at 21-month highs.

Despite the strategy to stabilize the rupiah, constant political bickering and communal violence in the country are pushing the beleaguered currency down.

"It's very clear that Bank Indonesia has already tightened monetary policy this year. That has led to some increase in interest rates in a policy that does provide some protection to the exchange rate," Baird said.

"Much more important of course is the overall political situation and market sentiment. Interest rates can only provide partial protection against that," he said.

Baird pointed out that higher interest rates were only a partial defense for the rupiah against Indonesia's political problems, which are widely blamed for pushing the currency down.

Currency dealers said the rupiah has been spooked by fears of violence if parliament issues a widely expected second censure motion against President Abdurrahman Wahid, pushing the embattled leader closer to possible impeachment.

Thousands of Wahid's passionate backers, including members of self-proclaimed suicide squads, have massed in Jakarta and vowed to rally in support of Indonesia's first democratically elected leader.

Baird, who chaired talks between the government and foreign donors earlier this week, said that with a better macroeconomic performance he believed it would be possible for market sentiment and the exchange rate to improve.

Economic reforms

Earlier, Jakarta was urged by donors to push ahead with tough economic reform in order to arrest the rupiah's fall.

Baird said the reforms are necessary, as it would ensure the support of the international community.

Indonesia has suffered severely since the Asian financial storm hit in 1997, tossing millions back into poverty and uncorking political and social chaos that has frightened off all but the bravest foreign investor.

Jakarta unveiled more bad news this week, confirming that budget assumptions for 2001 would need to be revised and approved by parliament.

That included cutting the economic growth forecast to 3.25-3.75 percent from five percent, raising the target for inflation and forecasting a weaker currency.

A controversial point on the revisions has been the government's decision to leave the budget deficit at 3.7 percent of GDP despite the sliding currency and rising interest rates.

The International Monetary Fund (IMF) has warned that the deficit could balloon to six percent of GDP without urgent reforms.

Reuters contributed to this report.

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The World Bank Group
Bank Indonesia - Central Bank of Republic of Indonesia

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