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e new Bank Indonesia regulation that prohibits individuals from buying more than US$100,000 worth of foreign exchange per month without specific underlying transactions should be seen as a preemptive measure to mitigate speculative attacks on the rupiah amid mounting uncertainty about the global economy.

The new policy is by no means a measure of foreign exchange (forex) control because people and businesses remain free to purchase forex for the import of goods and services, paying foreign debts and interests, the acquisition of foreign assets and overseas services such as medical treatment, school tuition, travels, pilgrimage and fees for offshore consulting, capital repatriation and dividend payments.

The new rule, announced last Friday, only slightly amended a 2008 regulation on forex purchases by removing savings deposits from the category of underlying transactions needed for buying more than $100,000 worth of foreign currencies.

The regulation would address some of the great concerns that big depositors may convert their savings into foreign currencies for transfer to banks in Singapore or Malaysia.

The 2008 forex rule stipulated that Indonesian citizens and companies wanting to buy $100,000 worth of foreign currencies should produce documents of underlying transactions and taxpayer registration numbers.

Indonesian and foreign citizens and entities remain free to purchase foreign currencies through spot, forward or derivative transactions, as long as they are supported with underlying transactions as payments for imports and other business deals such as dividend repatriation.

The new measure is designed only to regulate foreign exchange flows and minimize foreign exchange speculation or the purchase of foreign currencies without underlying transactions.

We are totally against any form of direct foreign exchange control as this draconian move would simply set off panic. Moreover, such a control is difficult to administer because technological innovations, such as new financial instruments, make it easier to circumvent capital controls.

Inadequate institutional capacity within our government, notorious for being one of the most corrupt in the world, makes the implementation of controls on foreign exchange flows highly problematic and vulnerable to abuse.

The latest measure is one of several regulations issued by the central bank to manage foreign exchange flows in a more orderly manner. There are several regulations already in place, which essentially facilitate a more effective monitoring of foreign exchange transactions by Bank Indonesia.

Commercial banks, for example, have long been required to report to the central bank any foreign exchange transactions in excess of $10,000.

In 2005, the central bank limited foreign exchange derivative transactions with foreign parties against the rupiah to a maximum $1 million and capped dollar purchases in outright forward transactions and swaps at $1 million.

These moves aim at preventing wild volatility of the rupiah by reducing the speculative element in the currency market, among other things, by decreasing the inflow of hot money to the country.

The country is now in stable shape economically, but a sudden downturn in the global economy would stretch thin the government’s resources, while lower tax revenues and high expenditures would drain its reserves very quickly. This could set off speculative downward pressures on the rupiah.