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)