Reserve requirement raised to slow down credit growth<\/p>\n
JAKARTA (JP): Bank Indonesia raised yesterday the bank reserve
\nrequirement to 3 percent from the present 2 percent in a fresh
\nmove to slow down the excessive growth in credits.<\/p>\n
Paul Sutopo, the central bank's managing director for the
\nmoney market and foreign exchange, announced that the rise in the
\nreserve requirement, the first since 1988, will become effective
\nin February next year.<\/p>\n
He said that the move requires commercial banks to keep at
\nleast 3 percent of their funds, including foreign exchange, at
\nthe central bank.<\/p>\n
The rise in the reserve requirement will automatically reduce
\nthe liquidity of commercial banks and at the same time push up
\ntheir overhead costs. This may then put more pressure on interest
\nrates.<\/p>\n
Paul, however, said the impact that the increased reserve
\nrequirement will have on the liquidity of banks will be minimal,
\ngiven the healthy condition of the banks' present reserves.<\/p>\n
"The one-percentage point increase is ideal and I think it
\nwill cause no problem to banks' liquidity," he said, adding that
\nthe average level of banks' reserves is above 2 percent.<\/p>\n
Under the new legal reserve requirement, each bank should
\ndeposit its reserve in its checking account at the central bank.
\nUnlike at present, the new requirement will not include each
\nbanks' ready cash (vault) or funds placed in Bank Indonesia
\nCertificates short-term promissory notes.<\/p>\n
Boediono, the central bank managing director for macroeconomic
\nand statistic affairs, said that the rise in the reserve
\nrequirement indicates a need to check the economy and keep it on
\nthe right track for next year.<\/p>\n
Overheating<\/p>\n
"However, it does not mean that we have a problem. The
\nmonetary system remains under control," he said when asked if the
\nrise in the reserve requirement is mainly directed at alleviating
\nthe economic overheating.<\/p>\n
President Soeharto was quoted by Minister\/State Secretary
\nMoerdiono as saying in Bangkok yesterday that Indonesia's economy
\nis overheating and that the government will take measures to
\nrelieve it.<\/p>\n
"The government has taken measures and will take more measures
\nto cool down the economy," Moerdiono told Indonesian reporters
\ncovering the fifth summit of the Association of Southeast Asian
\nNations in the Thai capital.<\/p>\n
Boediono said that the term overheating should be taken from
\nthe correct perspective because the wrong definition could mean
\nthere is something wrong with the economy.<\/p>\n
"The economic growth has been faster than the target. Imports
\ngrew higher than expected. In this case, it could be called
\noverheating," he said.<\/p>\n
The Singapore-based research unit of JP Morgan said recently
\nthat a tighter policy is needed to offset the stimulative impact
\nof the huge buildup of foreign and domestic investment approvals.<\/p>\n
According to JP Morgan, rising interest rates and reserve
\nrequirement are both essential to curb the growth in the money
\nsupply.<\/p>\n
Bank Indonesia Governor J. Soedradjad Djiwandono recently
\nwarned of an overheating economy, following the reported sharp
\nincrease in the money supply and in the current account deficit.<\/p>\n
The broad-term money supply increased by 26.5 percent in
\nSeptember, far higher than the 21 percent last year, Soedradjad
\nsaid.<\/p>\n
The higher than expected increase in imports also caused a
\nsharp increase in the current account deficit.<\/p>\n
The Econit advisory group predicts that the current account
\ndeficit will increase to US$6.4 billion this year from $3.1
\nbillion in 1994.<\/p>\n
Muchlis Rasjid, the central bank's managing director for
\ngeneral credits, said yesterday that the growth of credit has
\nbeen too high in the last few months.<\/p>\n
"The credit growth in November reached 25 percent. It should
\nbe reduced so that it will not be too high," he said, adding that
\nthe indicative increase in the credit growth in the current
\n1995\/1996 fiscal year is only 19.5 percent.<\/p>\n
Local analysts said that raising the interest rate alone would
\nno longer be effective in reducing the money supply because the
\nhigher interest rates could trigger the inflow of foreign short-
\nterm funds. An excessive flow of foreign funds, according to the
\nanalysts, would not only put pressure on the money supply but
\nalso make the central bank's tasks more difficult in keeping the
\nrupiah competitive. In addition, the high volume of foreign
\nshort-term funds would also increase Indonesia's vulnerability to
\nvolatile financial markets.<\/p>\n
Paul, however, said that the rise in the bank reserves will
\nnot be directed to mainly cushion money speculation.<\/p>\n
Besides having a sufficient amount of foreign reserves, Bank
\nIndonesia also has a joint arrangement with other central banks
\nin Asia to cushion the volatile short-term money market.<\/p>\n
Bank Indonesia, central banks and monetary authorities of
\nMalaysia, Singapore, Thailand, Hong Kong and Australia agreed in
\nSeptember to cooperate in dealing with money speculations.<\/p>\n
Paul said yesterday that such cooperation will be further
\nexpanded to other Asian countries so that regional banks will be
\nable to help each other in times of crisis. (hen\/mds\/rid)<\/p>",
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