Debate over Habibie's call on rates continues<\/p>\n
JAKARTA (JP): The debate over State Minister of Research and
\nTechnology B.J. Habibie's controversial call to cut interest
\nrates continued yesterday, with more economists calling his
\nsuggestion an absurd idea.<\/p>\n
Rizal Ramli, a director of the Econit advisory group, said
\nthat Habibie's call to cut annual lending rates gradually to as
\nlow as 4 percent is unrealistic.<\/p>\n
\"The appeal to cut the interest rates to such a low level is
\nquite strange and it could add to uncertainty in the country's
\neconomic outlook for 1997,\" Rizal said while presenting Econit's
\n1997 economic forecast.<\/p>\n
Habibie said that Indonesia's interest rates, which might be
\nthe highest in the world, should be slashed to as low as 4
\npercent per annum under what he termed the \"zig-zag\" mechanism.<\/p>\n
According to Habibie, the monetary authority should set a
\ntarget to lower interest rates to 4 percent, for example, by 2010
\nwhen the Asia-Pacific Economic Cooperation (APEC) forum's free
\ntrade arrangement is fully implemented.<\/p>\n
In order to meet this target, the monetary authority should
\nstart lowering deposit interest rates to 8 percent per annum from
\nthe present rate of 16 percent, he said.<\/p>\n
Rizal is not alone in his concern. Other economists and
\nbanking experts such as Rijanto and Faisal Basrie have also
\nquestioned Habibie's monetary hypothesis.<\/p>\n
The most shocking idea, however, is not Habibie's suggestion
\non how to reduce interest rates, but his theory about inflation.<\/p>\n
Habibie -- known as 'super minister' because of his close
\nrelationship with President Soeharto and his strong influence in
\nshaping the country's economic policies -- blamed the country's
\nhigh inflation rates on its high interest rates.<\/p>\n
Interest rates, according to Habibie, should therefore be
\nreduced in order to cut inflation rates.<\/p>\n
This notion runs counter to conventional monetary doctrine,
\nwhich says that lower interest rates fuel economic growth, which
\nin turn incites stronger inflationary pressure on the economy.<\/p>\n
Rizal said that Habibie's inflationary theory is a new and
\nuntested hypothesis.<\/p>\n
However unusual Habibie's theory about the relationship
\nbetween interest rates and inflation, most economists agree that
\nthe country's interest rates are too high.<\/p>\n
But economists also say that to cut interest rates overnight
\nby more than 3 percentage points is nearly impossible.<\/p>\n
A single percentage point is of major significance to the
\neconomy, Rizal said. If interest rates were lowered by 4
\npercentage points, the cut would incite massive outflows of
\nshort-term funds overseas, which in turn would shake Indonesia's
\nmonetary system.<\/p>\n
Deposit rates could be reduced at most by 1 percentage point
\nnext year from the present rate of 16 percent, Rizal said.<\/p>\n
\"The cut is possible due to the estimated decline in the
\ninflation rate by 1 percentage point to 7 percent this year,\" he
\nsaid.<\/p>\n
According to data provided by the Far Eastern Economic Review,
\nIndonesia's prime (lending) rate is 17 percent per annum, much
\nhigher than 2 percent in Singapore, 8.2 percent in Malaysia, 15
\npercent in Malaysia, and 13 percent in Thailand.<\/p>\n
Indonesia's real interest rate (the prime rate minus inflation
\nrate) is 10.9 percent, much higher than 0.4 percent in Singapore,
\n4.9 percent in Malaysia, 6.3 percent in the Philippines and 7.6
\npercent in Thailand.<\/p>\n
In other words, the Indonesian banks' interest margin is also
\nmuch higher than their counterparts in four neighboring
\ncountries.<\/p>\n
Faisal and Rijanto, like Rizal, said that the interest rates
\ncharged by domestic banks are higher because of their structural
\nproblems.<\/p>\n
\"It will, therefore, be difficult for the central bank to use
\nits power in lowering the rates if the problems in the banking
\nindustry are not thoroughly addressed,\" Rizal said, stressing
\nthat local banks are inefficient because of cross-ownership
\nbetween financial intermediaries and because of high rates of bad
\nloans.<\/p>\n
Minister of Finance Mar'ie Muhammad declined to comment on
\nHabibie's call to sharply cut the interest rates or on his
\ninflation theory.<\/p>\n
Bank Indonesia Governor J. Soedradjad said Monday that the
\ncentral bank has been working hard to reduce both the country's
\ninflation and interest rates.<\/p>\n
\"We do not only let the interest rates on the market mechanism
\nbut also control it through market interventions,\" he said. He
\ntoo, declined to comment on Habibie's appeal. (hen)<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/debate-over-habibies-call-on-rates-continues-1447893297",
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