Central Bank of Indonesia Would Implement Capital Control

Written by NGDlover

Labels :  News of Currency, Money and Fund

Notegolddiamond – A reputable Indonesian business tabloid -KONTAN online- issued a news about Indonesian Central Bank (BI) that who have been frustrated by the outflow and inflow of short term of foreign funds into Indonesia’s financial system, because these short-term funds movement frequently make the exchange rate  staggering. Today, BI is planning regulations or policies aimed at reducing this short time capital flow so that it make Rupiah stronger from the negative effects of short term foreign fund aka hot money, because the negative effects will be damped by the new policy. BI governor Nasution said, “We’ve discussed but not yet taken a decision (application) to do that,” he said after prayers in Friday at Masjid Baitul Ichsan Complex Bank Indonesia, Jakarta, Friday (11 / 6).

Central banks would only implement indirect restrictions . “I can not say what kind of discretion, if now we take the step, that would not the capital controls. We’re just trying to reduce the speed of inflow and outflow of capital. In Other words, there is no capital control measures,” said Nasution said, adding added that the new policy will be announced by the central bank in the near future. “We’ll announce it about a month or two. That is not the policy of capital controls but to reduce speed in and out of funds. Not only the funds from outside (the country) but also from within, we do not differentiate it,” he said.

What in the hell is Capital Control ? well, it is a type of restriction imposed by the government of any country on movement (inflow and outflow) of capital. It is mainly to prevent a country’s capital from moving freely in and out of its economy. For example , policies taken to restrict foreign investment in financial market, foreign direct investment on business or property and on investment on domestic resident on foreign property.

Capital controls are focused on short term capital dealings to defy estimated flows of capital that threaten to weaken their currency rate  stability and in turn diminish foreign exchange reserves.

Reasons that always given by `fan` of capital control is maintaining independent monetary policy as well as reducing pressure on exchange rate. Capital controls can aid in securing monetary and financial constancy even during unrelenting capital flows. Capital controls play exclusive role during huge capital inflows and when banks or financial institutions improperly evaluate their risk. For execution of cheap financing for government budgets like in Indonesia and for priority sectors, capital control provides full support.

As official said before,  Capital restrictions that will implement is a “Market-based” or indirect controls of capital that is intended to make any kind of capital transaction costly, which limits the flow of capital. Market-based or indirect controls can be imposed on exchange rate systems in form of dual or multiple policies, on cross-border capital flows in form of open taxation policies and indirect policies. Market-based or indirect capital controls exercises indirect regulatory controls on capital flows.

There is a good article explaining about monitoring short term capital flows here at http://www.mof.go.jp/jouhou/kokkin/tyousa/tyou073f.pdf, which explain about current constrain when comes to monitoring, and a short term capital monitoring systems which have purpose to

  • analysis this short term capital flows,
  • forecast of future short term capital flows,
  • diagnosis of necessary policies with concerning in intervention on foreign policy market,
  • tightening of prior approval or registration requirement systems, lowering threshold for particular transactions,
  • and controlling interest rate

June 11, 2010 - Posted by | Money & Fund, News of Currency

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