Monetary tools may not prevent overheating<\/p>\n
JAKARTA (JP): Existing monetary instruments are no longer
\neffective in dealing with economic overheating because of the
\ninterdependence between the country's economy and world financial
\ncenters.<\/p>\n
The head of the Economic Department at the Center for
\nStrategic and International Studies (CSIS), Mari Pangestu, said
\nyesterday the government should find new ways to solve the
\nproblem.<\/p>\n
She suggested the use of fiscal measures, such as cutting the
\ngovernment's spending or increasing tax collection.<\/p>\n
Speaking to newsmen after addressing the Asia-Pacific Forex
\nAssembly, Mari said that raising the interest rates on Bank
\nIndonesia Certificates (SBIs) would encourage foreign fund
\nmanagers to shift their portfolio investments into Indonesia for
\nhigher gains.<\/p>\n
\"Raising the SBI rates is a dilemma. It helps curb the money
\nsupply but at the same time incites inflow of foreign funds,\" she
\nsaid.<\/p>\n
SBI, a short-term promissory note, is the central bank's main
\ninstrument for reducing the volume of money in circulation.<\/p>\n
Senior economist Mohammad Sadli told the meeting that
\nIndonesia, as one of the world's important emerging markets, has
\nbeen the darling of foreign fund managers for years.<\/p>\n
He said that being the target of foreign fund managers, the
\ncountry is often posed problems caused by the volatility of their
\nportfolio investments.<\/p>\n
Sadli, a former cabinet minister, was one of speakers at the
\nforex meeting, as were Bank Indonesia Governor J. Soedradjad
\nDjiwandono and Toyoo Gyohten, chairman of the Bank of Tokyo.<\/p>\n
The meeting was officially opened by Vice President Try
\nSutrisno.<\/p>\n
New instruments<\/p>\n
Like Mari, Sadli suggested that the government formulate a new
\nblend of instruments for managing the country's monetary system.<\/p>\n
\"In the situation where the current account deficit is on the
\nincrease, it is difficult to use interest rates in dealing with
\neconomic overheating,\" he said.<\/p>\n
Speaking about the negative impact of the volatile foreign
\nfunds, Mari told journalists that the use of new instruments
\ncould not be avoided.<\/p>\n
The domino effect of the Mexican financial crisis early last
\nyear is still there even though the economic fundamentals of the
\ntwo countries are quite different, she said.<\/p>\n
\"The rush of foreign funds could take place any time,\" she
\nsaid. \"It could either result from the psychological impact of a
\nfinancial crisis in other emerging markets or an \"interruption\"
\nin the country's economy.\"<\/p>\n
She said she expected the effect of possible increased inflow
\nof foreign portfolio funds to be rather minimal because the
\nvolume of those short-term funds remains relatively small
\ncompared to those in Mexico or other emerging markets.<\/p>\n
\"I think, the central bank will face no difficulty in solving
\nsuch a problem,\" Mari said, adding that the central bank's policy
\non widening of the spread of the rupiah's buying and selling
\nrates, in addition to its significant foreign reserves would be
\nadequate enough to cushion volatile foreign portfolio funds.<\/p>\n
Mari said a much more serious problem would emerge if domestic
\ninvestors followed the rush.<\/p>\n
Foreign reserves held by Bank Indonesia reached around US$14.5
\nbillion as of October, an amount which is sufficient to finance
\nimports for five months.<\/p>\n
Mari said that the country's widening current account deficit,
\nwhich has become a cause of concern among foreign investors, is
\nwithin the safe level, as long as the deficit resulted from an
\nincrease in imports of productive goods.<\/p>\n
The Econit advisory group estimates the current account
\ndeficit will more than double to $6.4 billion this year from the
\n$3.1 billion estimated for 1994. (hen)<\/p>",
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