Sumitro blasts zig-zag interest rate theory<\/p>\n
JAKARTA (JP): Sumitro Djojohadikusumo, Indonesia's most senior
\neconomist, supports the view of most analysts that State Minister
\nfor Research and Technology B.J. Habibie's zig-zag theory on
\ninterest rate reduction is entirely unfeasible.<\/p>\n
\"What is this zig-zag all about. You want to make this
\ncountry bankrupt?,\" he asked rhetorically yesterday.<\/p>\n
He was referring to Habibie's suggestion that interest rates
\nbe halved from their current levels of between 18 percent and 20
\npercent.<\/p>\n
Speaking to journalists here at a conference organized by the
\nInternational Monetary Fund (IMF) and Bank Indonesia, Sumitro
\nsaid it was now virtually impossible to cut interest rates
\nsignificantly because inflationary pressures were so strong.<\/p>\n
Habibie said Indonesia's interest rates, among the highest in
\nthe world, should be reduced to as low as 4 percent per annum in
\nthe next five years under a \"zig-zag\" mechanism.<\/p>\n
Habibie said the monetary authority should initially halve
\ndeposit rates to 8 percent from their current levels of around 16
\npercent.<\/p>\n
Habibie, dubbed a \"super minister\" because of his close
\nrelationship with President Soeharto and his strong influence in
\ngovernment, believes high interest rates are a major cause of the
\ncountry's high inflation.<\/p>\n
Interest rates, according to Habibie, should be reduced to cut
\ninflation.<\/p>\n
Habibie's theory has been rejected by almost all local
\neconomists who say his theory is unworkable given the state of
\nthe national economy, which is suffering from high-capital costs.<\/p>\n
Bank Indonesia (central bank) Governor J. Soedradjad
\nDjiwandono has lambasted Habibie's suggestion as totally
\nunrealistic.<\/p>\n
\"The problem of high interest rates cannot be resolved simply
\nby the uttering of a word because there are so many variables
\ninvolved,\" Soedrajad said Wednesday.<\/p>\n
Sumitro, a former finance minister and architect of the New
\nOrder's economic development program, said inflation was not
\ncaused by high interest rates but by poor distribution of goods
\nand rampant market distortions.<\/p>\n
He said the impact of interest rates on inflation was very
\nsmall. \"It is certainly much less than the estimated 30 percent
\nlosses in government development spending,\" he said in reference
\nto public funds wasted by malfeasance and inefficiency.<\/p>\n
Sumitro, one of the most outspoken economists in the country,
\nestimated earlier that the government was losing around 30
\npercent of its budget because of inefficiency and corruption.<\/p>\n
The government has strongly denied his assertion.<\/p>\n
Sumitro said it was imperative that the government improve its
\noverall economic efficiency and eliminate monopolistic practices
\nand corruption.<\/p>\n
He said this approach would reduce Indonesian interest rates
\nbecause efficiency is the key to reducing costs.<\/p>\n
\"The theory on inflation is actually taught in the first year
\nof economics,\" he said. \"If you want to say something, you should
\nfirst study the subject,\" he added, apparently regarding
\nHabibie's theory.<\/p>\n
According to Bank Indonesia's latest data, the average
\ninterest rate on three-month deposits is 17.35 percent, while
\nprimary lending rates for working capital and investments are
\n19.35 percent and 16.39 percent respectively.<\/p>\n
Local economists say the estimated one percentage point drop
\nin the inflation rate to 7 percent this year would, at most,
\nallow a one percentage point cut in interest rates. (hen)<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/sumitro-blasts-zig-zag-interest-rate-theory-1447893297",
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