For many years, Indonesia has had an exceedingly complex exchange system, with a large number of buying and selling rates, a wide spread between rates, and various mixtures of free market elements with fixed rates. Another aspect of the complexity of the Indonesian exchange rate structure has been the frequent changes—at least one in each year since 1955—and the practice of giving different names to basically the same exchange devices when changes have been made in the exchange rate structure. Thus, among other names, the export inducement certificate (which, as will be seen later, has been a central feature of the exchange system) has at various times been called SPP, SIVA, and BE, and the exchange tax has been called an import surcharge, a retribution tax, a price component levy, an export promotion tax, PUIM, PUEK, and TPI. A number of these levies were often enforced at the same time at different rates for different categories of transactions.1 The Indonesian multiple currency system has generally incorporated the following basic devices: basic selling and buying rates, a tax on exchange receipts, the export inducement certificate, and taxes on foreign exchange sales. The frequent changes in the exchange structure have been related to changes in the magnitude or attributes of one or more of these devices.
This paper describes the development of the Indonesian exchange system up to the end of 1964, in terms of these basic devices, and also attempts to evaluate the working of the system. Any such attempt, however, has to take account of the importance of exogenous factors, which increasingly restricted the usefulness of a measure like multiple exchange rates. The functioning of Indonesia’s economy was much influenced by noneconomic factors. A major consequence of this was the persistent domestic inflation that characterized the Indonesian economy, and the general weakening of the system of production and distribution. Another significant exogenous factor was the deterioration in Indonesia’s terms of trade as determined by the world prices of Indonesia’s exports and imports. A direct result of these factors was the continuing deficit in the Indonesian balance of payments. In the early years, the country supported its import expenditures by drawing down accumulated reserves and later by accruing foreign liabilities. Increased foreign indebtedness, however, brought in its train a heavy outlay of foreign exchange to service foreign debt. Faced with this pattern of foreign exchange payments, Indonesia relied increasingly on quantitative restrictions on foreign exchange payments and direct state participation in external trade and payments. The system of multiple exchange rates could thus have only a limited influence on Indonesia’s foreign exchange payments.
In the evaluation, some general conclusions are drawn about the multiple exchange system as it operated in Indonesia, and its impact principally on the balance of payments and the domestic inflationary situation. In this context, attention has been given to some specific aspects of the Indonesian exchange rate system that tended to reduce its effectiveness, particularly in raising maximum revenue from the export-import sector.
Mr. Kanesa-Thasan, economist in the Asian Department and currently Fund Advisor to the Republic of Korea, is a graduate of the University of Ceylon. He was formerly with the Central Bank of Ceylon. He has had several papers published in economic journals.
In addition, special taxes of relatively small magnitude have been imposed on the exchange rates, e.g., LAAPLN tax and the Trans Sumatra throughway tax.
Calculated by applying the unofficial market price of the U.S. dollar soon after the reform, to the portion of exchange proceeds allowed to be retained.
The complexity of exchange rates probably reached its high point during the period immediately before the exchange reform of May 1963. There were then simultaneously in operation (1) three different types of exchange certificates valid for different types of foreign exchange payments issued against certain percentages of export earnings; (2) an exchange retention scheme permitting the exporter to retain a small part of his export earnings for use for certain categories of imports; and (3) differential rates of import surcharges applicable to different categories of nonessential imports. There were, as a result, more than 15 separate import rates in operation.
At the end of 1964—derived from the basic buying rate of Rp 250 and the current market price for the export inducement certificate, amounting to 20 per cent of export receipts.