Multiple Exchange Rates: The Indonesian Experience

From the Foreword to the first issue: “Among the responsibilities of the International Monetary Fund, as set forth in the Articles of Agreement, is the obligation to fact as a center for the collection and exchange of information on monetary and financial problems,’ and thereby to facilitate ‘the preparation of studies designed to assist members in developing policies which further the purposes of the Fund.’ The publications of the Fund are one way in which this responsibility is discharged. “Through the publication of Staff Papers, the Fund is making available some of the work of members of its staff. The Fund believes that these papers will be found helpful by government officials, by professional economists, and by others concerned with monetary and financial problems. Much of what is now presented is quite provisional. On some international monetary problems, final and definitive views are scarcely to be expected in the near future, and several alternative, or even conflicting, approaches may profitably be explored. The views presented in these papers are not, therefore, to be interpreted as necessarily indicating the position of the Executive Board or of the officials of the Fund.”


From the Foreword to the first issue: “Among the responsibilities of the International Monetary Fund, as set forth in the Articles of Agreement, is the obligation to fact as a center for the collection and exchange of information on monetary and financial problems,’ and thereby to facilitate ‘the preparation of studies designed to assist members in developing policies which further the purposes of the Fund.’ The publications of the Fund are one way in which this responsibility is discharged. “Through the publication of Staff Papers, the Fund is making available some of the work of members of its staff. The Fund believes that these papers will be found helpful by government officials, by professional economists, and by others concerned with monetary and financial problems. Much of what is now presented is quite provisional. On some international monetary problems, final and definitive views are scarcely to be expected in the near future, and several alternative, or even conflicting, approaches may profitably be explored. The views presented in these papers are not, therefore, to be interpreted as necessarily indicating the position of the Executive Board or of the officials of the Fund.”

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.

Main Features of the System

The multiple exchange rate structure in Indonesia was essentially a mixed exchange structure, consisting of a fixed exchange rate component and a free market component. The fixed part consisted of the basic rate, and the import and export taxes levied on the exchange sale or purchase; the free market component comprised (1) mainly export inducement certificates issued to the recipient of the foreign exchange, which he could sell or use for effecting specified categories of import and service payments, and (2) a foreign exchange entitlement allowing the exporter to retain a proportion of the foreign exchange receipts for use in making specified types of import and service payments. The mix of the fixed exchange rate component and the free component varied; at most times the market component was limited to only a relatively small part of total receipts and payments. It also needs to be emphasized that the term “free market rate” was in most periods a misnomer because the prices of export inducement certificates were more often than not supported or pegged by Bank Indonesia.

The official multiple exchange rate system did not apply to the foreign transactions of the petroleum sector, except to the limited extent that rupiahs needed by oil companies for their local operations, in excess of their accrual of rupiahs from the domestic sales of petroleum products, had to be obtained by converting foreign exchange at the lowest buying rate applicable to exports, i.e., the most appreciated buying rate of exchange. Other than this, the petroleum sector was virtually autonomous of the Indonesian exchange control system and its multiple exchange rates. It was, of course, accountable to the Indonesian exchange control in that it had to supply periodic statements of its foreign exchange receipts and payments.

Another exception from the official multiple exchange rate structure was the barter trade which some parts of Sumatra were permitted to conduct with Penang and Singapore. Under these arrangements, exporters were entitled to retain 30 per cent of the proceeds from exports to Singapore and Penang for use in purchasing specified goods. The balance of 70 per cent was converted into rupiahs at the official export rate. The goods imported against the 30 per cent retained proceeds were subject to the usual import taxes, including the exchange tax on import payments. Much further removed from the official rates of exchange, but subject to tacit official acceptance during most times, was the effective rate of exchange arising from the leakage of foreign exchange into the black market through the undervaluation of exports. Reflecting this exchange leakage, the domestic rupiah prices of export commodities were higher than the rupiah equivalent of their foreign exchange prices in the world market at the official effective rates. The premium rupiah price paid by exporters was rendered possible only by the authorities not imposing the exchange surrender requirements up to the full world market valuation of the exports. By permitting the undervaluation of exports, the authorities were, in fact, operating an exchange retention scheme, allowing the exporters the use of a larger proportion of the actual export earnings than was permitted through their publicly announced exchange system. The exchange could be legally used only for imports (including luxury items) into Indonesia, subject to the same import and exchange taxes as imports against exchange sold by the authorities. This condonation of the violation of the exchange controls was due to the practical necessity, first, of keeping exports moving as much as possible through the official channels and, second, of seeing to it that foreign exchange which had leaked out was not entirely lost to the country, but would be available for imports, even of luxury items.

Export inducement certificates

The use of export inducement certificates was an important feature of the Indonesian exchange structure, except for relatively brief periods. Exporters and other recipients of foreign exchange (except the petroleum sector) received exchange certificates equal to part or all of their export proceeds in foreign exchange. Importers had to pay for their foreign exchange at the basic rate of exchange plus exchange taxes on imports and export inducement certificates of an equivalent foreign exchange value. Generally, this last requirement was applied only to certain nonessential categories of imports, and only for a short period (in 1957-59) to all imports. Certificates issued to exporters could be sold to registered importers or could be used by the exporters themselves to pay for imports. The market in export inducement certificates was intended to be free and their price to be freely determined, but the authorities nearly always intervened in the certificate market by issuing certificates against their own exchange reserves or through more direct measures to restrict the demand for certificates.

The export inducement certificate system introduced a flexible element into the exchange rate structure. First, it provided the exporter with a higher export rate than the basic rate, the premium being borne directly by the importer when he purchased the certificates. The export incentive was larger, the larger the amount of certificates issued (as a proportion of export receipts) and the higher the price of the certificates. Second, the system increased the import rate of exchange for the imports for which supplementary payment in certificates was required—generally for nonessential imports. Third, it automatically limited the amount of foreign exchange available for nonessential imports to the value of the export inducement certificates issued to exporters and others, except to the extent that Bank Indonesia issued “special” certificates against its own reserves, as it usually did in order to support the certificate market and to make an exchange profit.

Since in almost all recent years the total foreign exchange purchased by Bank Indonesia was hardly adequate even to cover payments for essential merchandise and invisibles, the extent to which Bank Indonesia could issue its own “special” certificates was limited. Bank Indonesia’s exchange profits were also limited by its policy of supporting the certificate market or pegging the export inducement certificate price in the market, in order to restrict the depreciation of the exchange rate. Since the amount of the special certificates issued by the authorities was quite small in relation to the total demand for certificates, the open market price of “general” certificates tended to be considerably more than the price of the “special” certificates of Bank Indonesia. When it attempted a policy of pegging the exchange certificate price, Bank Indonesia announced ceiling prices at which certificate transactions could take place in the market, and in support adopted various direct measures—e.g., by reducing the period of validity of the certificates, restricting the transferability of the certificates and the range of goods which could be imported against them, and restricting the issue of import licenses for such goods. As a rule, the certificate market worked freely only for a short period following each major exchange reform. Thereafter the intervention of the authorities was progressively intensified until the next exchange reform was introduced.

Exchange tax

The other major element in the exchange rate structure was the exchange tax (or subsidy). This tax was superimposed on the basic official rate, to make up the fixed (nonmarket) component of the exchange rates, except between 1957 and 1959, when there was no operative basic exchange rate. In those years, export inducement certificates applied to all foreign exchange receipts and payments, and the effective exchange rate was intended to be determined by the market. During this period the exchange tax was levied on the effective exchange rate, viz., the price of the export inducement certificate.

Generally the exchange tax (or subsidy) was levied on a uniform basis on all exchange receipts. The principal exceptions were the subsidy paid on exchange sold by tourists and an export subsidy which, for a limited time after the exchange reform of 1955, was paid on a differentiated basis on certain exports considered to be in a weak competitive position. For import payments, on the other hand, the exchange tax was always on a graduated basis; in general, the most essential items were exempted, and higher rates were imposed on nonessential imports. For purposes of import licensing and the exchange tax, imports were usually classified into different groups. From time to time the authorities varied the classification, thereby altering the effective exchange rate on imports, e.g., through changes in the rates of exchange tax. A parallel tax was also imposed on payments for invisibles.

The most essential imports (Group I)—consisting mainly of rice, fertilizers, raw cotton, and government imports—together with government payments for invisibles were nearly always exempted from the exchange tax and were subject only to the basic exchange rate. The next category of imports, consisting principally of raw materials and machinery for the export and import-substituting industries (Group II imports), were subject in general to a relatively low rate of exchange tax. All other imports normally required supplementary payment in export inducement certificates in addition to payment of high exchange taxes, graduated according to different categories of nonessentiality. Since such imports, however, generally represented only a small proportion of total imports, the average effective import rate of exchange was not substantially different from the official basic rate of exchange. Therefore, in recent years the average effective buying price of the authorities differed but little from their average effective selling price, limiting the revenue accruing to them from exchange operations. As mentioned earlier, the extent to which the authorities were able to add to their exchange profits through sales of special export inducement certificates was also limited because they had little exchange to spare for relatively nonessential imports.

Exchange retention

A third device, used only for limited periods, was the exchange retention scheme, whereby recipients of foreign exchange were allowed to retain a portion of their receipts abroad to finance their own imports. Usually the portion allowed to be retained was very small. However, between May 1963 and April 1964, when it was 15 per cent for the exporter and 20 per cent for the producer-exporter, it operated as a substitute for export inducement certificates. The use of retained exchange was limited to essential imports. Although retained exchange differed from export inducement certificates in that it was nontransferable and was limited to essential imports by the exporter, it could be treated as part of the official free market like exchange certificates.

Development of the System Since 1955

The Indonesian economy in recent years has been dominated by the increasing intensity of the domestic inflation. Indonesia’s management of the exchange rate structure was guided mainly by the necessity of keeping pace with the internal inflationary rise in domestic costs and prices. Thus, the underlying theme of the numerous changes in the exchange rate structure was the progressive depreciation of the effective exchange rate.

A few of the many changes in the exchange rate structure represented major attempts at exchange reform, directed toward establishing realistic rates of exchange, simplifying the multiple exchange rate structure, and progressively liberalizing quantitative restrictions on imports. None of these attempts at exchange reform went beyond a simplification of the multiple exchange rate structure, and the need for the multiple exchange rate system itself was never seriously in question. These exchange reforms were also supported by fiscal and monetary measures directed toward curbing domestic inflation. Increased revenue receipts from the exchange rate adjustment and advance deposits on imports served as key elements in the domestic anti-inflationary program. Such exchange reforms were attempted on four occasions—in 1955, 1957, 1959, and 1963. Although substantial devaluation in the effective exchange rates was made on each of these occasions, the nature of the exchange rate adjustment adopted was not uniform. In the 1955 exchange reform, the main change in the exchange rate structure took the form of a sharp increase in the import surcharges (exchange tax) on nonessential imports and the imposition of an import surcharge for the first time on essential imports. As a result of this change, the effective import rate of exchange depreciated sharply. The effective rate of exchange applicable to exports was also devalued by the elimination of the export tax and the payment, in addition, of an export subsidy for a limited range of “weak” export commodities. As part of the exchange rate simplification, all existing systems of export inducement certificates, export-import linking, and exchange auctions—the last of which applied to a very limited range of exports and imports—were also eliminated.

The exchange reform in 1957 was based on an entirely different approach from that of earlier reforms. It created a free market for export inducement certificates in which the effective exchange rate was to be determined without interference from the authorities. Export inducement certificates were issued against all exchange receipts and were required against all foreign exchange payments, including payments for essential imports. The certificates were freely traded between exporters and importers; their market price determined the effective exchange rate. The basic official rate of exchange, which remained unchanged, was inoperative. Import surcharges were also simplified and were applied as a ratio of the certificate price rather than of the inoperative basic official rate. As a result, the burden of the import surcharges on less essential imports was substantially increased, even though the tax rates themselves were reduced. Essential imports were not subject to the surcharge. On the export side, part of the higher export rate provided by the export inducement certificate rate was taxed away in the form of an export tax of 20 per cent. The new exchange system brought about a substantial devaluation in the effective exchange rates, particularly the rates applicable to imports, and was also successful in earning larger revenue for the Government in the form of import surcharges and export duties. It was not allowed, however, to work freely for long. Within a few months, the authorities stepped in to peg the certificate price, when it continued to rise sharply with renewed domestic inflation.

The main element in the exchange rate changes in 1959 and 1963 was the devaluation of the basic official rate of exchange. These were the only two occasions during the past decade when the basic official rate was changed. On both occasions, the devaluation in the basic official rate was supported by the elimination of the existing export inducement certificate system and by a simplification of the structure of import surcharges. For the most part, the 1959 devaluation in the basic official exchange rate only formalized the effective depreciation in the exchange rate that had already occurred through the sharp rise in the price of certificates under the system introduced in 1957. The extra margin of devaluation in the effective basic rate of exchange through the change in the official rate and the adjustments in the import surcharges was quite small. The 1963 devaluation in effective rates, on the other hand, was substantial. Devaluation of the effective basic official rate was supplemented by the elimination of the export tax and by an exchange retention scheme under which (1) exporters were allowed to retain 5 per cent of their export proceeds, and (2) a further 10 per cent to exporters and 15 per cent to producer-exporters was automatically allocated for imports falling within the “essential” categories. The existing system of export inducement certificates was abandoned. The sum total effect of the 1963 changes—in the basic official rate, import surcharges, and the exchange retention scheme—was to bring about a substantial devaluation in the effective export and import rates of exchange. The effective export rate was depreciated by roughly 40 per cent.2 The effective devaluation in the import rate was even greater because essential imports, which now represented over three fourths of total imports, were covered by the 86 per cent depreciation in the basic exchange rate, and the import surcharges on semiessential (raw materials, spare parts) and nonessential imports were sharply increased. To soften the impact of the general devaluation on a few essential import items, particularly fertilizers, some import subsidies were also introduced.

Whatever the particular form of these major changes, they succeeded only temporarily in establishing exchange rates which were realistically aligned with domestic prices and costs so as to provide an adequate incentive for exports to move through official channels, and to divert to government revenue a substantial part of the windfall profits which had previously accrued to importers, particularly of essential goods, at the overvalued rates of exchange. The margin of devaluation in the import rate was generally greater than that in the export rate. This difference, especially marked in 1955, 1957, and 1963 as shown earlier, was achieved by applying the depreciated effective import rate to essential imports and by making the new exchange rate the base for the import surcharges on nonessential imports. The benefit to exporters of the depreciation, however, was reduced as a result of the export subsidies being eliminated and export taxes being increased. The larger depreciation in the import rate than in the export rate helped effectively as a means of mobilizing substantial additional revenue for the Government, through export taxes, import surcharges, and exchange profits. Although the margin of depreciation was less for effective export rates than for import rates, it was still, in each case, adequate to stimulate the flow of exports and to eliminate temporarily the “price premium” shown by domestic prices of export commodies, a premium reflecting the leakage of foreign exchange into the black market through smuggling and under-invoicing of exports.

On the import side, too, despite the sharp depreciation in the effective import rates, the domestic price level did not immediately show a comparable increase. In fact, the price level tended to remain relatively stable for some time after each major change, reflecting the liberalization of imports, the anti-inflationary financial measures adopted, and, in particular, the changed public expectations that price and exchange stability would continue. However, the size of these gains from each exchange reform and their duration progressively declined over the years, as the underlying inflationary trend became intensified and the inflationary psychology more strongly entrenched in the public mind.

The gains from each exchange devaluation were quickly eroded by renewed domestic inflation, triggered mostly by political events such as the 1958 rebellion, the West Irian dispute, and the Malaysian confrontation policy. In the periods between the major exchange reforms, the official exchange rate policy was generally characterized by efforts to slow down the depreciation in the official exchange rates. These efforts were coupled with actions directed toward providing partial incentives to exporters through export inducement certificates or exchange retention schemes, and toward increasing import surcharges on nonessential imports on an increasingly differentiated basis while the effective rates for essential imports were kept unchanged. The Government also increasingly fell back on quantitative restrictions on imports and direct state participation in import and export trade as a means of influencing the balance of payments. There were many such changes in the multiple exchange rate structure—at least one in each of the years intervening between the major exchange reforms referred to earlier. The main effects of these changes in the exchange structure were to devalue the exchange rate in smaller installments than were necessitated by the pace of domestic inflation, and to make the exchange structure more and more complex by increasing the range of exchange rates applicable to different categories of exports and imports.3

An essential element of exchange rate policy during these periods was the wish to insulate imports of essential goods from the depreciation in the import rates. The prevailing overvalued basic official rates of exchange were applied to such imports, and the progressive increases in import surcharges were restricted to semiessential and nonessential imports. Since only limited amounts of import licenses were issued for semiessential and nonessential imports, the rates applicable for essential imports represented virtually the effective import rate of exchange. At these rates, the rupiah costs of imports were out of alignment with their rising domestic prices. This lack of alignment applied also to the restricted nonessential imports, even at the higher import rates of exchange applicable to them. Unlike the major exchange reforms, these depreciations in the export rates were also insufficient to provide an adequate incentive for exports as domestic costs increased. As a result, export production suffered, and an increasing amount of foreign exchange was lost to the black market. In addition, the margin of devaluation in the effective import rates tended to be less than the effective depreciation in the export rates. In fact, following the changes in the exchange rate structure in April 1964, the effective export rate (the rate applicable to the bulk of exports was Rp 1,575=US$14) was much higher than the effective import rate (the rate applicable to the bulk of imports was Rp 250). The authorities sustained no loss from exchange operations since the higher export rate was paid by importers directly to exporters through the high market price for export inducement certificates, but the Government did lose the chance to use the exchange system as an anti-inflationary means of mobilizing additional revenue.

Although the rate structure was radically reformed in 1963, as noted earlier, the 1963 reforms, too, were effective for only a short period. After the failure of supporting anti-inflationary measures, money supply and prices rose sharply. In April 1964, the authorities again changed the exchange structure, reintroducing export inducement certificates and in fact appreciating the effective import rate (from Rp 315 to Rp 250) for most of the essential (Group I) imports. The import rate was again made more complex by making a fixed exchange levy applicable to certain imports, and the export inducement certificate requirement to others. In addition, certain categories of exporters were issued more export inducement certificates (30 per cent of export earnings) than others, and producer-exporters were allowed to retain 5 per cent of their export receipts for importing a limited range of items for their own use.

An Evaluation of the Indonesian Experience

The theoretical case for a multiple exchange rate system in a primary producing country like Indonesia is usually based on three arguments: (1) It is a more advantageous method of meeting the balance of payments problems of a country with a relatively low elasticity of world demand for—and more particularly of domestic supply of—its exports, than a straightforward devaluation of a unified exchange rate. (2) Given such elasticities of demand and supply, it represents the way of meeting the balance of payments deficit with the least unsettling effects on domestic prices, cost of living, income distribution, and production. (3) The undeveloped tax structure of the country, in particular the customs tariff structure, makes it imperative to rely on multiple exchange rates both as a means of anti-inflationary revenue collection and as a means of directly meeting the balance of payments problem. Other advantages often claimed for multiple exchange rates as a source of government revenue are that they are more flexible and easier to enforce than customs duties and are less likely to meet with political resistance because they are operated as part of the exchange system.

The Indonesian experience with multiple exchange rates, however, did not bear out these arguments for three reasons: (1) Some of the basic assumptions underlying the above arguments did not apply to Indonesia, particularly as a result of the continuing inflation. (2) There has been a structural change in the economy—again to some extent under the stress of inflation—resulting in greater reliance on direct controls and direct government participation in production and trade, thereby limiting the role of the pricing system. (3) Finally, certain specific aspects of the multiple exchange rate system in Indonesia limited its usefulness, particularly in maximizing revenue from the export-import sector.

In the Indonesian context it would be more appropriate to think in terms of the elasticity of supply of foreign exchange rather than in the conventional manner of elasticity of supply of exports. The supply of foreign exchange to government authorities is influenced, first, by the response of export production to price changes and, second, by the incentive to earn and sell exchange through the unofficial exchange markets at given official rates of exchange. The second is determined by a wide variety of factors, apart from the prevailing rate of exchange—for example, the restrictiveness of exchange and import controls; the pressures for capital flight arising from a lack of confidence in the local currency and other factors, e.g., political; and the facilities available for smuggling of goods or for the underinvoicing of exports and overinvoicing of imports.

In Indonesia during recent years the supply of foreign exchange to official channels has been far from inelastic. There has been a considerable margin of underutilization of existing production capacity in the export sector (and import-substitute sector) and also an active black market in foreign exchange into which considerable amounts of foreign exchange were diverted as a result of the overvalued official rates of exchange and other factors referred to earlier. Given the continuous rise in domestic prices and costs, the official rates of exchange did not provide an adequate incentive to produce for export, particularly in the later years.

The full disincentive effect of the overvalued official rate of exchange on export production, however, was not felt because of the rupiah price premium available within Indonesia for export commodities. The price premium (that is the excess of the domestic rupiah prices for export commodities over what they should have been at the prevailing foreign exchange f.o.b. price and the official export rates of exchange) reflected a situation in which the exporter surrendered to the authorities at the official rate only part of the actual foreign exchange proceeds received for his exports and sold the balance at the black market rates of exchange. The fact that this price premium applied to major exports (and not merely to a fringe market) and was sometimes (even before 1964) well in excess of 100 per cent indicates substantial leakage of foreign exchange into the black market. Intermittently the authorities did take an account of this drain by imposing a “surrender price” for exports below the real f.o.b. price, and by permitting the maintenance of balances abroad for the import of goods into Indonesia.

The assumption of a relatively inelastic world demand for exports was equally invalid for Indonesia. An inelastic world demand situation for Indonesia’s primary products could be said to have existed only during the postwar period of scarcity. Because of the growth in the world supply of the commodities which are Indonesia’s principal exports (natural rubber, tea, tin, and petroleum) and in the world supply of substitutes (synthetic rubber and coffee), on the one hand, and the decline in Indonesia’s export production, on the other, Indonesia’s share of the world trade in its export commodities was quite small. Even if a substantial increase in Indonesian exports had resulted from a devaluation of the export rate, it was not likely to lower their world price noticeably or to turn the terms of trade against Indonesia.

The maintenance of an overvalued export rate of exchange in the multiple exchange rate system in Indonesia, therefore, did contribute significantly to the decline in recorded export earnings, although non-economic factors which disrupted production and the system of distribution were probably at least equally responsible. If to this situation is added the secondary impact of curtailed production of exports and import substitutes caused by the disruption in the flow of production requisites, such as raw materials and machinery, resulting from the exchange shortage, then the total exchange loss from the overvalued export rates must have been quite substantial.

In regard to the import rate of exchange, an advantage claimed for a multiple exchange rate system is that it would permit devaluation of the import rate to be effected so as to discriminate between different categories of imports. This advantage would depend, however, on the structure of imports and import rates of exchange being such that the margin of devaluation in the average effective import rate was adequate to curtail over-all import outlays and to divert to the Government’s revenue the profits on imports which had previously accrued to importers at the overvalued import rates of exchange. In Indonesia, however, nearly all imports consisted either of very essential goods or of direct imports of the Government. Since the most overvalued rates of exchange were applied to such imports, the margin of devaluation in the average effective import rate was, for the most part, relatively small. The inflationary rise in domestic prices and costs, therefore, caused the import rate of exchange to become progressively more and more out of alignment with prices. A multiple exchange system loses most of its rationale if the effective import rate cannot be flexibly changed. It fails in its purpose as a means of correcting the balance of payments deficit and of raising anti-inflationary revenue. Any rigidity in the import rate structure also imposes a limit on the extent to which the export rate can be adjusted as an incentive to exports. If the devaluation is larger for the export rate than for the import rate of exchange, the losses incurred by the authorities on exchange transactions add to the inflationary pressures.

In fact, the Indonesian multiple exchange rate system involved overvalued export and import rates of exchange. Their effect was to hamper and distort domestic production and distribution, to encourage the growth of a significantly large black market in foreign exchange, and most probably also to make the real income distribution less equal by allowing large tax-free profits to be made by middlemen and operators in export and import trade through the black market. The Indonesian authorities attempted to counter these effects by an increasing reliance on direct controls and government participation in production and distribution, thereby further inhibiting the role of the exchange rate system.

It cannot be argued, of course, that the overvalued rates of exchange were necessarily the direct consequence of the multiple exchange rate system. In the context of continued inflation, the overvaluation would have been present even if there had been a unified exchange rate. The point to be realized is that Indonesia gained no advantage from the multiple exchange rate system. In fact, it can be argued that the complex nature of the multiple exchange rate system directly contributed to the maintenance of overvalued exchange rates by helping to cloud the basic issues involved.

The multiple exchange rate system as it operated in Indonesia also failed to mobilize the full revenue potential of the export-import sectors. The exchange rate structure, as noted earlier, consisted of a fixed exchange rate component made up of the basic essential rate, export taxes (or subsidies), and import surcharges, and a variable component made up of export inducement certificates. The fixed component constituted the effective buying and selling rates of the authorities, except to the limited extent that the authorities sold export inducement certificates against their own exchange reserves. The basic official rates were seldom changed, and the import surcharges, which applied generally only to nonessential imports, were computed on the basic official rates. Thus, there was a growing disparity between the effective buying and selling rates of the authorities, on the one hand, and even the overvalued effective export and import rates, inclusive of the export inducement certificate element, on the other. The buying and selling rates of the authorities were increasingly isolated from the inflationary rise in prices and costs. In contrast, the difference between the effective buying and selling rates of the authorities tended to diminish as the weighting increased, in the import structure, of essential items which were exempted from import surcharges.

The nature of the Indonesian multiple exchange rate system was thus unsuited to the role of collecting maximum revenue. Additionally, the overvalued export and import rates maintained under the system adversely affected revenue collected from the export-import sector in other ways: (1) The rupiah tax base of the export sector (on which the taxes are levied) was depressed by the overvalued rates of exchange. (2) The rupiah prices of imports were pegged through the overvalued rates of exchange, leaving the importer or the trader to profit from the inflationary rise in domestic prices of imported goods at the expense of government revenue. (3) Finally, part of the exchange transactions was diverted into the black market, where exchange receipts and payments escaped not only the exchange taxes but also the taxes on income.

Taux de change multiples: l’expérience indonésienne


L’Indonésie applique depuis de nombreuses années un régime très complexe de taux de change multiples. L’auteur décrit l’évolution du système, analyse ses dispositifs fondamentaux et s’efforce également d’en apprécier les éléments. L’expérience indonésienne ne vient pas à l’appui des raisons souvent invoquées en faveur des taux de change multiples dans un pays de production primaire; on dit en effet qu’ils pourraient permettre, mieux qu’une dévaluation pure et simple, de résoudre le probléme de la balance des paiements tout en servant par ailleurs de moyen anti-inflationniste pour mobiliser le maximum de ressources fiscales. En Indonésie le régime de taux de change multiples a abouti à surévaluer les taux de change applicables aux exportations et aux importations. Cette situation eut des répercussions défavorables sur la production destinée à l’exportation, un montant important de devises s’est trouvé détourné vers le marché parallèle et enfin, les secteurs importation-exportation n’ont pas donné toutes les recettes publiques qu’ils auraient pu fournir. C’est à trois raisons que l’on attribue ce résultat: 1) un certain nombre des hypothéses fondamentales sur lesquelles s’appuient les défenseurs des taux de change multiples—par exemple l’élasticité relativement réduite de l’offre en Indonésie et de la demande sur le marché mondial en ce qui concerne les produits d’exportation—ne se sont pas appliquées à l’lndonésie; 2) l’économie a subi des modifications de structure qui ont amené à recourir davantage au contrôle immédiat de l’Etat et à sa participation directe à la production et aux échanges commerciaux, limitant de ce fait le rôle du mécanisme des prix et 3) certains caractères particuliers du régime indonésien ont fait en sorte que les recettes n’ont pas atteint leur maximum.

Tipos de cambio múltiples: la experiencia de Indonesia


Durante algunos años Indonesia ha venido utilizando un sistema muy complejo de tipos de cambio múltiples. Este trabajo describe la evolución del sistema y los instrumentos básicos empleados, y también intenta valorar esa experiencia. El caso de Indonesia no sustenta los argumentos que frecuentemente se aducen para utilizar tipos de cambio múltiples en los países de producción primaria, o sea, que tales tipos pueden constituir un método mejor que la mera devaluatión para hacer trente a los problemas de la balanza de pagos, y que sirven también como un medio para movilizar los máximos recursos fiscales antiinfla-cionarios. En Indonesia, el empleo del sistema de tipos de cambio múltiples determinó tipos de cambio sobrevaluados para las exportaciones e importaciones. Como resultado, la productión destinada a la exportatión fue afectada adversamente y una cantidad considerable de divisas se desvió hacia el mercado negro; además, no pudo aprovecharse el pleno potential tributario de los sectores de exportatión e importatión. Esta experiencia se atribuye a tres motivos: (1) varios de los supuestos fundamentals que sirven de base a los argumentos a favor de los tipos de cambio múltiples—a saber, la elasticidad relativamente baja de la oferta interna y de la demanda mundial para las exportaciones—no se dan en el caso de Indonesia; (2) ha habido un cambio estructural en la economía, el cual ha traído como consecuencia que se haya confiado más en los controles directos y en la participatión directa del Estado en la production y en el comercio, limitándose la actión del mecanismo de los precios; y (3) ciertos aspectos específicos del sistema utilizado en Indonesia retardaron su utilidad como medio para obtener los máximos ingresos tributarios.

In the tables throughout this issue, and in the English text of the papers

Dots (…) indicate that data are not available;

A dash (—) indicates that the figure is zero or less than half the final digit shown, or that the item does not exist;

A single dot (.) indicates decimals;

A comma (,) separates thousands and millions;

“Billion” means a thousand million;

A hyphen (-) is used between years or months (e.g., 1955-58 or January-October) to indicate a total of the years or months inclusive of the beginning and ending years or months;

A stroke (/) is used between years (e.g., 1962/63) to indicate a fiscal year or a crop year.


The International Monetary Fund publishes from time to time pamphlets descriptive of various aspects of its functions. The following is a list of the pamphlets so far published:

  • 1. Introduction to the Fund (in English, 1964; in French and Spanish, 1965. Second edition in English, 1965; in French 1966; Spanish and German, in preparation)

  • 2. The International Monetary Fund: Its Form and Functions, by J. Marcus Fleming (in English, 1964; French and Spanish, in preparation)

  • 3. The International Monetary Fund and Private Business Transactions: Some Legal Effects of the Articles of Agreement, by Joseph Gold (in English and Spanish, 1965; in French, 1966)

  • 4. The International Monetary Fund and International Law: An Introduction, by Joseph Gold (in English, 1965; French and Spanish, in preparation)

  • 5. The Financial Structure of the Fund, by Rudolf Kroc (in English, French, and Spanish, 1965)

  • 6. Maintenance of the Gold Value of the Fund’s Assets, by Joseph Gold (in English, 1965; French and Spanish, in preparation)

  • 7. The Fund and Non-Member States: Some Legal Effects, by Joseph Gold (in English, 1966; French and Spanish in preparation)

These pamphlets are available without charge. Application should be made to:

The Secretary

International Monetary Fund

19th and H Streets, N.W.

Washington, D.C. 20431


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.