Soedradjad's caution<\/p>\n
The likely success in checking the inflation rate at less than
\n7 percent this year, compared to 8.65 percent last year, should
\nnot create too high expectations among businessmen of a
\nsignificant easing of the tight monetary policy. Bank Indonesia's
\nGovernor Soedradjad Djiwandono, instead of hinting at the
\npossibility of a relaxed monetary stance in the near future, has
\nreasserted the imperative for both fiscal and monetary
\nconservatism.<\/p>\n
Soedradjad told participants at a seminar on the economic
\nprospects in 1997 Tuesday that the situation had not yet become
\nsolidly stable to allow for a substantial easing of the monetary
\npolicy. The economic overheating, though already starting to cool
\ndown, remains highly vulnerable to inflationary pressures. The
\nmain reason is that the economic growth has been fueled mainly by
\nthe domestic market demand, and not by export expansion.<\/p>\n
The central bank governor seems to be afraid that a
\nsubstantial easing of the monetary policy now could trigger a new
\nwave of inflationary pressures. This, combined with the big
\ndeficit in the current account of the balance of payments, could
\nlead to a devastating instability. Soedradjad was also not
\ngreatly optimistic about the ability of exports to regain their
\nprevious robust growth of more than 17 percent a year.<\/p>\n
Soedradjad seemed still uncomfortable with the developments in
\nthe monetary aggregates. The money supply (narrowly-defined) has
\nbeen expanding by an annual rate of 27.5 percent, much higher
\nthan the target of 15 percent, as has been the economic
\nliquidity, with a growth rate of 26.1 percent, as against the
\ntarget of 17 percent. Lendings by the banking industry, even
\nthough still groaning under a large amount of bad credits,
\ncontinue to increase at an annual rate of 19.8 percent, compared
\nto the target of 16 percent.<\/p>\n
But two additional policy instruments (prudential rulings) are
\nalready in place to exact a contractive impact on lending growth
\nnext year. Banks will have to increase their compulsory reserve
\nrequirement at the central bank from 3 percent now to 5 percent (
\nof third-party deposits) beginning in the middle of April. Banks
\nwill also have to increase their capital adequacy ratio from 8
\npercent now to 9 percent beginning in September. That will force
\nbanks to risk a larger amount of their own capital, and this in
\nturn is expected to pressure them to be more careful in their
\nlending operations. The higher capitalization standard will curb
\ntheir credit growth because they have to put up additional
\ncapital in proportion to any increase in their credit expansion.<\/p>\n
However, bank credits are not the only source of additional
\nliquidity to the economy. The large sum of the public sector's
\nspendings outside the state budget, which again came under strong
\ncriticism from the House Budgetary Commission at a hearing with
\nthe finance minister last week, is beyond Soedradjad's ability to
\ncontrol. But the off-state budget spending, which will most
\nlikely increase sharply next year as the dominant Golkar
\npolitical organization steps up the distribution of "political
\ngoodies" in the run-up to the general election in May, will
\ncertainly have a greatly expansive impact on the money supply.<\/p>\n
Soedradjad predictably refrained from citing that political
\nfactor in his analysis at the seminar, but we reckon he is fully
\naware of its potential threat to the monetary stability and he
\nhas inputted it into his monetary management.<\/p>\n
The central bank is indeed facing a delicate task. As the
\ndomestic interest rates will remain relatively much higher than
\nthose overseas, the country will continue to be attractive to
\nshort-term, speculative capital. However helpful this capital may
\nbe to offset the current account deficit, that kind of capital is
\nhighly vulnerable to rumors or political events which would
\nunavoidably increase before and after the election. Soedradjad
\napparently wants to gear up for any developments.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/soedradjads-caution-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}