The gains came as Indonesia's finance minister, Mar'ie Muhammad, confirmed that Jakarta was ''preparing the supporting frameworks, including the regulations'' for a currency board that would peg the rupiah to the dollar. Market approval for the Indonesian currency board stems from the stability it would give the rupiah and the way it removes political interference from monetary policy by essentially closing the central bank. A currency board would legally bind the rupiah to other currencies, probably the dollar, at a stated rate of exchange, thereby coupling Indonesia's monetary policy to decisions taken in Washington by the Federal Reserve Board. Currency boards, which are in place in Hong Kong, Argentina and several other economies, hold onto a reserve of dollars or other currency equivalent to the national money supply. When any local currency is converted into dollars, the national money supply shrinks, forcing banks to pay higher rates of interest.
Critics doubt that Indonesia has sufficient reserves to back a currency board fully.
They also warn that Indonesia's already struggling banks would be unable to pay high interest rates and that strict controls would have to be in place to stop a rush for dollars when the system was put into place. Mr. Eschweiler said. The currency board would create some problems, but at least you have the possibility of things getting better,'' said Neil Saker, head of regional economic research at SocGen Crosby Securities. Mr. Saker added that only when countries adopt currency boards do they gain the stability needed to settle payments for trade in local currencies, a concept being promoted by Prime Minister Mahathir bin Mohamad of Malaysia. Last week Mr. Mahathir toured Southeast Asia to push for the use of local currencies instead of spending precious dollars.