T

his is a comment on an article on page 13 of the The Jakarta Post'€™s June 28 edition entitled '€œBank Indonesia'€™s no-dollar rule may create no distortion: Govt'€.

Bank Indonesia is pretending that the no-dollar policy is '€œno big deal'€. It is a very big deal and it is not acceptable. The Indonesian government is trying desperately to corral inflation and slow capital flight, but this policy will not work.

Bank Indonesia'€™s foreign currency controls and forced-tender policies are nothing but a very desperate attempt to shore up a struggling rupiah. Countries including Ghana, Zimbabwe, Venezuela, South Africa, Argentina, Brazil and Zambia have used currency controls to prop up their ailing currencies and prevent an economic crash.

These policies end up hurting businesses and lead to shortages of food, medicine and much else.

When convertibility is allowed for profit remittances but with less than full convertibility, it damages businesses and investor confidence.

This explains why foreign investors are less willing to invest new money in a country with such controls, even with '€œguarantees'€ on profit remittances.

Investors become justifiably nervous when it seems a government is considering imposing exchange controls. At that point, settled money becomes '€œhot'€ and capital flight occurs.

Asset owners liquidate their property and get out while the going is good. Contrary to popular wisdom, restrictions on convertibility do not retard capital flight, they promote it.

Now you see why investors are leaving, or staying away from, Indonesia.

SD
Jakarta