BI acts to cool down economy

BI acts to cool down economy

JAKARTA (JP): Bank Indonesia announced an expansion of the
intervention band to 8 percent and a rise in the minimum reserve
requirement to 5 percent yesterday in a surprising move to reduce
speculative trading and to cool down the overheated economy.

Bank Indonesia Governor J. Soedradjad Djiwandono said that the
expansion of the intervention band of the rupiah against the U.S.
dollar from 5 percent was necessary to reduce speculative trading
in the equity and money markets.

Soedradjad explained that the expansion of the intervention
band was part of the central bank's policies designed to cool
down the overheating economy as well as to strengthen the ability
of the money authority to control currency fluctuations.

"The move is an important measure to stabilize the overall
monetary situation," he told reporters after the central bank's
hearing with House Commission VII for finance and trade.

He said that the rapid growth in the financial market over the
last five years had not only had a positive impact on the
country's economy but also often caused jittery trading in the
money market.

The average daily transactions in the rupiah market increased
sharply from Rp 400 billion in 1994 to over Rp 1.1 trillion in
1995 and to Rp 20 trillion in June this year. The average daily
transactions in the foreign exchange market also jumped from
US$2.2 billion in 1994 to more than $5 billion in 1995 and $7
billion in June of this year.

"The daily foreign exchange transactions exceeded $14 billion
at the end of July," he said.

In the capital market, the average daily stock transactions
surged from Rp 109 billion in 1994 to Rp 150 billion in 1995 and
to more than Rp 269 billion in June.

"Non-fundamental factors such as the rioting on July 27 often
incited uncertainty in the financial market," he said, referring
to the unrest which erupted following the storming of the
Indonesian Democratic Party's headquarter from its ousted leader
Megawati Soekarnoputri.

He denied that yesterday's move was launched to counter a
worsening of the political situation or the worsening of the
country's economic fundamentals.

Foreign reserves

Soedradjad said that the foreign exchange reserves held by the
central bank remained at a healthy level of $16.45 billion in
July, slightly lower than the $16.48 billion in June.

"In addition, we still have a standby loan of $2 billion," he
said of the central bank's financial situation.

Soedradjad said that the central bank's decision to raise the
minimum reserve requirement for commercial banks from 3 percent
to 5 percent on April 16, 1997, was expected to contain the
economic overheating.

"The rise in the reserve requirement, the second since
February, is necessary to limit the maneuverability of commercial
banks," he said.

He said that the rise in the reserve requirement from 2
percent to 3 percent in February this year had actually had a
positive impact in line with the central bank's efforts to cool
down the overheated economy.

"But our target has not been achieved. The inflation rate has
dropped but we want a much lower rate. The current account
deficit is still under control but we have to prevent it from
widening further," he said.

Soedradjad said the outstanding loans provided by the
country's commercial banks rose by 25 percent in July this year
-- far higher than the central bank's 18 percent target for the
1996/97 fiscal year -- to Rp 264.55 trillion as of July this year
from Rp 211.76 trillion in the same month of 1995.

The growth rate of the loans reached 34 percent in the same
period, much higher than the 14 percent growth booked by the
state-owned banks.

The rupiah's value rose sharply against the dollar to 2.326 in
early trading on the spot market here yesterday from 2.348 on the
previous day, following the central bank's move to widen the
intervention band.

The rise in the intervention band allows the rupiah to
fluctuate within a range of 192 points or 8 percent. With the
rise, the central bank will only intervene in the market when the
dollar trades on the spot market at 4 percent above or below the
middle value of its daily conversion rates.

However, the central bank's surprising move caused jittery
trading on the Jakarta Stock Exchange as foreign investors feared
that the rise in the reserve requirement would cause a rise in
the inflation rate. (hen)