The spectre of inflation<\/p>\n
Bank Indonesia's move on Monday to nearly double the interest
\nrates on its benchmark instruments (SBI) to a range of 40 percent
\nto 45 percent for papers of one week to two months should have
\nbeen the best of the worst alternatives it has in addressing the
\nthreat of inflation and arresting the rupiah's fall. The
\nimmediate consequence, though, is that a lot more businesses may
\nhave to fold.<\/p>\n
The SBI rate increase is obviously designed to soak up excess
\nliquidity that is threatening to increase inflationary pressures.
\nThe central bank said M1 -- currency and demand deposits --
\nexpanded by 12.15 percent last December, and by 18.45 percent in
\nJanuary, to reach Rp 92.8 trillion, before declining slightly to
\nRp 92.5 trillion in February. M2 (M1 plus savings, time deposits
\nand other quasi money) also rose sharply by 7.6 percent in
\nDecember and 26.73 percent in January to reach Rp 450.7 trillion,
\nbut decreased to Rp 430.2 trillion in February.<\/p>\n
The anomaly here is that most national banks are cash
\nstrapped. The central bank's governor, Sjahril Sabirin,
\nacknowledged Monday that Bank Indonesia had been forced to pump
\ncash into banks. As many big depositors cashed out of private
\nnational banks immediately after the November closure of 16
\nailing banks, most local banks would not have stayed afloat
\nwithout liquidity injection from the central bank.<\/p>\n
The problem now is that people are not spending. Nor are they
\nputting money in many local banks, which they consider too risky.
\nMany depositors have moved their savings to foreign banks in
\nJakarta or overseas, especially in the wake of anti-Chinese riots
\nin January and February. A lot of money is not circulating, but
\nis kept instead in safe-deposit boxes, tucked under mattresses
\nand crammed into holes in the floor.<\/p>\n
Bank Indonesia is indeed caught in a precarious dilemma
\nbecause of the blanket guarantee it has provided for rupiah and
\nforeign exchange claims on all locally chartered commercial banks
\nsince January. If it stops supporting the banks, most of them are
\nlikely to collapse, undermining further the already sagging
\nconfidence in the banking sector. If, however, it keeps injecting
\ncash, it risks worsening inflation, projected at a range of 40
\npercent to 50 percent for this year -- inflation in the first two
\nmonths already reaching almost 20 percent -- especially because
\nthe government's decision to continue food, fuel and electricity
\nsubsidies will require the central bank to print more money this
\nyear.<\/p>\n
Pumping money into ailing banks, including grossly
\ninefficient ones, is also against the banking reforms already
\nagreed on with the International Monetary Fund (IMF).<\/p>\n
Basically, Bank Indonesia is just buying time and delaying
\nbankruptcies, which will only serve to hinder the progress of
\nbanking reforms. Which leaves us wondering what has been done by
\nthe Indonesian Bank Restructuring Agency (IBRA) whose former
\nchief, Bambang Subianto -- known for his tough stance on ailing
\nbanks irrespective of the political backing of their shareholders
\n-- was fired last month after less than two months in that post.<\/p>\n
As local banks can now increase their deposit rates to as
\nhigh as 65 percent (150 percent as high as the SBI rates), they
\nhopefully will be able to lure back a hefty portion of the money
\nnow outside the banking industry. Foreign banks, currently awash
\nin liquidity but averse to lending to national banks, may also be
\nattracted to put their excess liquidity into SBIs.<\/p>\n
Nonetheless, Bank Indonesia cannot maintain such prohibitively
\nhigh interest rates for some time without crippling economic
\nactivities. This means the IBRA should speed up the
\nimplementation of banking reforms in order to restore public
\nconfidence in the national banking industry.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/the-spectre-of-inflation-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}