Fri, 18 Aug 2000

BI estimates inflation to exceed government target

JAKARTA (JP): Bank Indonesia said on Wednesday that inflation would likely be at about 7.67 percent this year, exceeding the government's target of between 5 percent and 7 percent.

The central bank said in its latest economic report that prices would be higher than initially expected due to the weakening of the rupiah and a planned increase in fuel prices later this year.

Bank Indonesia said that the weakening of the rupiah against the U.S. dollar had increased the price of imported goods and raw materials.

The rupiah dropped to a 21-month low of 9,570 per U.S. dollar last month amid domestic political uncertainty. But signs of easing political tension between President Abdurrahman Wahid and top legislators this month has helped the rupiah to strengthen to about Rp 8,300 per dollar.

The government had adopted an exchange rate of Rp 7,000 per dollar for this year.

A reduction in fuel subsidies is planned for October, which will cause fuel prices to increase. That increase will raise the cost of transportation and prices of manufactured products.

Bank Indonesia also predicted that inflation in 2001 would range between 6 percent and 8 percent.

The central bank has allowed the benchmark interest rate of its one-month Bank Indonesia promissory notes (SBIs) to increase for the past several weeks to help the ailing rupiah and curb inflationary pressure.

The benchmark interest rate move higher to 13.56 percent at an auction on Wednesday, compared to 13.52 percent last week.

Bank Indonesia officials earlier said that they wanted to see the benchmark interest rate at about 12 percent by the end of this year.

On the rupiah, Bank Indonesia forecast that the local unit would strengthen to between 7,780 to 8,200 per dollar in the July to September period.

It also said that the rupiah would strengthen to between Rp 6,500 and Rp 7,000 to the dollar next year.

The rupiah weakened slightly to 8,348 per dollar on Wednesday, compared to 8,315 on Tuesday as investors awaited the result of the upcoming Cabinet reshuffle, details of which are scheduled to be announced on Monday.

On the economy, Bank Indonesia maintained its initial forecast of 3 percent to 4 percent growth in gross domestic product (GDP) this year.

But the central bank said that the economy would grow higher next year at between 4 percent to 5 percent.

The economy contracted by more than 13 percent in 1998 when the economic crisis deepened and grew by 0.2 percent last year.

Bank Indonesia said that exports were projected to increase to US$14.13 billion in the third quarter, from $13.88 billion in the second quarter of this year.

It added that imports were also expected to rise to $8.72 billion in the third quarter from $8.3 billion in the second quarter.

Bank Indonesia said that current account surplus was expected to shrink to $1.29 billion in the July to September period from $1.34 billion in the previous quarter as import growth would exceed export growth.

Bank Indonesia said that foreign exchange reserves in the third quarter would be equal to 7.1 months of imports, higher than 6.8 months of imports in the second quarter.

Total investment was expected to grow by between 1 percent and 2 percent this year and jump to between 5.5 percent and 6.5 percent next year, Bank Indonesia said.

It said that the resumption in bank lending would help increase the amount of total investment both by the private and government sectors.

Total investment dropped by 20 percent last year.

The government has almost completed the country's bank restructuring and recapitalization program, allowing banks to resume lending, albeit in relatively small volumes.(rei)