Curbing credit growth<\/p>\n
The central bank again moved to restrict credit growth and
\nreduce speculative foreign exchange trading in a stronger bid to
\nmaintain monetary stability and contain an overheating economy.
\nBank Indonesia on Wednesday increased its intervention band for
\nthe rupiah by three percentage points to 8 percent and decided to
\nraise the minimum reserve requirement ratio of banks by two
\npercentage points to 5 percent of deposits beginning April 16,
\n1997.<\/p>\n
The two measures, the central bank said, were designed to
\nstrengthen its monetary management in coping with an overheating
\neconomy and high credit growth, which has apparently exceeded
\nBank Indonesia's monetary targets.<\/p>\n
The widening of the bid-offer band of the rupiah to the
\nAmerican dollar, for the second time in three months, immediately
\nincreases the risk of foreign exchange speculation while
\ntransferring most of the risk to speculators. This will
\nconsequently reduce the inflow of speculative capital. But the
\nwider intervention band also offers more opportunities to private
\nmarket makers and allows the central bank to maintain its level
\nof foreign reserves at a comfortable level.<\/p>\n
The monetary measure, we think, was well timed in view of the
\nheavily political national agenda in the run-up to the general
\nelection within the next eight months. Short-term foreign funds
\nwhich flow in to tap high domestic interest rates and portfolio
\ncapital on the stock exchanges are highly vulnerable to
\nnoneconomic factors such as political events, wild rumors and
\nother speculation unrelated to economic fundamentals.<\/p>\n
The wider intervention band will enable the central bank to
\nmanage its monetary targets better because it will not have to
\nabsorb a large amount of dollars in case of high inflows and draw
\non its foreign reserves in case of a reverse flow of foreign
\nfunds or a run on the rupiah. In the 1992\/1993 fiscal year, for
\nexample, the central bank spent over $1 billion sterilizing
\nshort-term capital flows.<\/p>\n
The central bank said the volume of foreign exchange trading
\nin Jakarta had increased steadily from a daily average of US$5
\nbillion last year to $7 billion in June and to as much as $14
\nbillion by the end of July, apparently from the impact of the
\nJuly 27 riots in some parts of the capital city.<\/p>\n
Experience, however, shows that the intervention band only
\nsupplements the efforts required to maintain monetary stability.
\nThis measure is helpful only when macroeconomic management
\nremains sound, the main policy framework remains stable and
\nconsistent and exports continue to grow faster than imports.<\/p>\n
The rise in the minimum reserve requirement will further
\ndampen credit growth because the banks must deposit a larger
\namount of earning assets at the central bank as idle money. This
\nwill raise their cost of funds and consequently drive up interest
\nrates. The central bank was apparently disappointed that the
\ncommercial banks, notably the private banks, did not take much
\nheed of its appeal for prudent lending. Bank lending has grown by
\nmore than 25 percent in the first seven months of this year, far
\nhigher than the annual target of 17 percent set early this year.
\nDaily transactions on the inter-bank rupiah market have almost
\ndoubled from Rp 1.1 trillion last year to Rp 2 trillion in June.<\/p>\n
But the central bank is fulfilling its commitment to avoid any
\nshock-therapy measures by phasing in the higher reserve
\nrequirement only next April, or seven months after the widening
\nof the rupiah's intervention band. Governor Soedradjad Djiwandono
\napparently wants to see the impact of the wider intervention band
\nand the full effect of the one percentage-point increase in the
\nreserve requirement last February.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/curbing-credit-growth-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}