EXECUTIVE SUMMARY “CURRENCY BOARD- INDONESIA”

Indonesia in order to give stability to its currency which is the rupee and
consequently put an end to the rising inflation, which they had at that time that
would inevitably lead to a worse financial crisis if the relevant measures were not
taken, the then president Suharto thought about implementing a currency board
system, however despite appearing to be a good strategy to escape the crisis that
the Asian countries were facing at that time, they were brutally stopped by the then
president of the United States Bill Clinton and the IMF international monetary fund,
as the president of Indonesia Suharto was preceded by an abuse of his power by
implementing policies and actions that mainly benefited him and his group.

This background resulted in the IMF and the United States want to intervene to
stop him and take him out of power, because they were convinced that Suharto
only wanted to use the currency board system to benefit again, of course the IMF
and USA knew that this the strategy could help Indonesia not be affected to a
greater extent by the financial crisis, but despite this they took action so that the
currency board system was not implemented, threatening Suharto not to provide
them with more monetary help if he decided to apply the strategy ,this pressure
caused Suharto to abandon the idea of continuing with the plan and continuing with
the normal system.

Critics and opponents questioned the way in which Suharto's strategy was going to
be implemented, as many considered that Indonesia did not have the conditions to
have a currency board system since it was already in a financial crisis and it was
not certain whether they met the requirements such as having a high level of
reserves, just as they already had a devalued currency.

The decision taken by President Suharto resulted in the collapse of the rupee and
an accelerated increase in inflation, it is notable that those who opposed the
decision that Suharto considered to implement the currency board system did not
consider that this could be the response to the economic problem that Indonesia is
handling at that time and were blinded by Suharto's background, seeing everything
as an opportunity to get something out of the then president of Indonesia.

This currency board system offered different advantages for Indonesia at the time,
such as a low level of inflation that was very important for this country since they
presented an accelerated inflation growth due to the crisis in Asia, a currency
stability which was the result of the inflation that arose, however one of the
difficulties that Indonesia presented, which was one of the reasons why it did not
have a hitch in the currency board system was the determination of what type of
exchange they would use and the Linking currency, since they decided that the
currency would be the US dollar but did not establish an exchange rate that
matched the rupee. Indonesia with the currency board was looking for
macroeconomic stability which they could obtain with the different benefits that the
currency board system gave it.

Like any decision, it also has two faces, the lack of autonomy with respect to
economic decisions, the lack of control because of not having a central bank,
because if the value of the currency rises, interest rates will increase due to which
also increases the demand for currencies, which causes a loss of liquidity and at
the same time stimulates activities such as export in order to recover liquidity
through the entry of money, and thus, we see that monetary conditions are
determined by conditions of the foreign exchange market, in addition to this, a
country with a currency exchange system will not be 100% protected against
speculative attacks.

The loss of confidence in the decisions that were being made due to the change of
administration showed the discontent he was making regarding the rupee, in
addition to the attack he suffered and his imminent loss of value. In addition to the
above, the administration said things like it would save the rupee without raising
interest rates, something very unfeasible.