BI to keep money policy prudent<\/p>\n
JAKARTA (JP): Bank Indonesia, the central bank, will maintain
\nthe country's prudential monetary system despite encouraging
\ndevelopment in the country's macro-economy during the first eight
\nmonths of this year.<\/p>\n
Central Bank Governor J. Soedradjad Djiwandono said here
\nyesterday that the overall macroeconomic conditions have been
\nrelatively stable in the first eight months of this year.<\/p>\n
\"Inflation has been kept under control in the past eight
\nmonths while signs of economic recovery continued,\" he told a
\nbusiness luncheon held by the Indonesian Executive Circle.<\/p>\n
However, the governor warned the government and the private
\nsector to be cautious of another overheating condition.<\/p>\n
\"We all want the Indonesian economy to grow but the growth
\nshould be sustainable, without overheating,\" he said, adding that
\nthis condition hit Indonesia in 1990, severely hurting the
\ncountry's economy.<\/p>\n
The tight monetary measures taken in 1990 by the government to
\nsqueeze economic liquidity had caused an increase in deposit
\nrates to over 28 percent per annum, partly leading to the
\ncollapse of business activities in certain sectors and also sharp
\nincreases in unperforming loans in both state private banks.<\/p>\n
Soedradjad said that at the macro-economic level, the monetary
\npolicy taken in 1993 and the early part of this year was aimed at
\nsustaining macro-economic stability and at the same time
\nsupported the process of economic recovery.<\/p>\n
\"In this regard, we are aware that we have to maintain
\nprudential principles as a basic foundation of fiscal and
\nmonetary actions,\" he said, adding that the prudential principles
\nrequire the central bank to maintain the growth of money supply
\nand credit \"at levels consistent with overall macro-economic
\nstability.\"<\/p>\n
Business analysts project the country's economic growth at 6.7
\npercent this year, slightly above the government's projection of
\n6.2 percent.<\/p>\n
Yardstick<\/p>\n
The central bank governor said that there is no proper
\nyardstick that could be applied to measure suitable economic
\ngrowth for Indonesia.<\/p>\n
\"It depends on supply and demand,\" he answered, when asked if
\nthe economic growth of seven percent could lead to an overheating
\nof the country's economy.<\/p>\n
Speaking about challenges, Soedradjad said that the task of
\nthe central bank will be more difficult in the coming years not
\nonly due to an increase in bad debt problems in state and private
\nbanks but also due to more diversified banking products and the
\nintroduction of more developed financial instruments.<\/p>\n
\"Thus, in formulating monetary policies we have to consider
\nnot only development of the banking sector but also the
\ndevelopment of other financial instruments,\" he said.<\/p>\n
Soedradjad said that the foreign exchange market was better
\ndeveloped after the central bank further widened the bid-offer
\nspread (band) for the exchange rate.<\/p>\n
After being widened in December 1993, the spread between
\nbuying and selling rates was widened again early this month from
\none percent of the central rate to 1.5 percent.<\/p>\n
He said that the widening of the spread has encouraged long-
\nterm currency trading. In addition, it has given the central
\nbank more room to absorb short-term capital flows that might
\ndestabilize the economy.<\/p>\n
\"At present, the central bank has more room to intervene in
\nthe market in order to secure the value of the rupiah at a
\nrealistic level,\" he said, adding that widening the band is also
\na crucial step in safeguarding the central bank's prudential
\npolicy as a wider band will transfer more risk to short-term
\nspeculators and thus deter short-term inflows.(hen)<\/p>",
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