JAKARTA: Indonesia has adequate foreign exchange reserves to defend its rupiah currency from weakening too much against the US dollar, but it is important to let the exchange rate remain flexible, the International Monetary Fund said on Friday.
The IMF also said it did not "see any need" for Bank Indonesia to change its current policy rate level, which is a record low 5.75 percent.
The fund has lowered its Indonesian inflation forecast to 5 percent year-on-year by the end 2012 from 6.2 percent. The IMF projects Indonesian economic growth this year at 6.1 percent.
The rupiah, second worst performer among emerging Asian currencies tracked by Reuters, has lost about 3.5 percent this year against the dollar as some foreign investors - worried over the euro zone crisis - have fled to what they consider safer assets.
"It's important that the rupiah be allowed to adjust depending on how the global factors pan out, how the domestic economy plays... It's important to make sure that the rupiah is flexible," Sanjaya Panth, division chief in the IMF's Asia and Pacific Department, said on Friday.
"Reserves are adequate so it's appropriate for the central bank to step in to smoothen (the exchange rate) temporarily," said Panth, who led an IMF mission that visited Jakarta the past two weeks.
Indonesia's foreign exchange reserves fell to $106.50 billion as of June 29 from $111.53 billion a month earlier, central bank data shows. The weak rupiah and falling exports likely contributed to the decline.
Bank Indonesia has kept the policy rate at 5.75 percent since cutting it by 25 basis points in January. It will likely hold the rate again when meeting on July 12 while pursuing other policy measures to stabilise the rupiah.
In June, Indonesia's pace of inflation picked up to 4.53 percent from a year earlier, but that was still well within the central bank's target of 3.5 to 5.5 percent for the year. Inflation likely remains under control this year as the chance for the government to raise subsidised fuel prices is getting slimmer.
CURRENT ACCOUNT DEFICIT 'NATURAL'
The IMF expects Indonesia this year to have a current account deficit of 1 percent of gross domestic product, which Panth said would be "natural" considering the growing economy.
To propel growth, the IMF suggested that Indonesia gradually eliminate energy subsidies and direct the money to other needs such as infrastructure or education. The country should also maintain a free and open trade regime and investment climate, according to the fund.
"It is important to make sure that Indonesia continues to be perceived as a very attractive destination, and to the extent that the government can clarify and come up with a consistent, coherent framework, that also will help assure investors about the continued attractiveness about Indonesia," said Panth.
According to the finance ministry, energy subsidies this year could soar more than 50 percent above target to 216.8 trillion rupiah ($23.10 billion).
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