BI says political stability a must for economic reform

BI says political stability a must for economic reform

WASHINGTON (Reuters): Improving Indonesia's fragile political
stability is the key to restoring the credibility of the
country's stalled economic reform program, the deputy governor of
Indonesia's central bank said on Monday.

"If the political situation improves then maybe we can give
monetary policy a chance to work," Achjar IRAs, deputy governor
of Bank Indonesia told Reuters in an interview.

"To implement a tough program of economic reform, there is no
easy policy. For a difficult policy you need to have a commitment
from the government, supported by the parliament," he added.

Indonesia's parliament instead has been preoccupied with a
second censure of President Abdurrahman Wahid over two graft
scandals, involvement in which he denies.

Parliament voted for censure earlier on Monday, setting the
stage for the possible impeachment of the near-blind Muslim
cleric and more instability for the troubled country.

The censure heaps pressure on Wahid to step down and increases
speculation he will not survive to serve out his term, which
expires in 2004.

That has raised fears in financial markets of bloodshed if
Wahid's supporters clash with those of his opponents.

Iljas, speaking on the sidelines of the IMF and World Bank
spring meetings here, said there was a risk of violence if
Wahid's supporters misconstrued newly instituted democratic
processes -- including that of censure -- as being designed to
oust him.

"This is a democratic process... I hope any protests will be
peaceful and there will be no panic in the market," Iljas said.

Wahid has 30 days to respond to the censure.

Turbulent politics have knocked the rupiah currency clattering
down to 30-month lows recently and the country's stock market is
one of the worst performing in Asia this year, down about 14
percent so far.

But as fears of violence on the streets of Jakarta faded
slightly on Monday, the rupiah rose to one-week highs of 11,550
to the dollar.

Asked if the rupiah risked sinking past 12,000 during the
coming 30 days, Iljas said: "I hope not."

"Once confidence can be restored, the rupiah should benefit
from that because then capital flows can start," he added.

Stability in the rupiah is essential for Indonesia to fight
inflation and keep to ambitious budget deficit targets being
demanded by the IMF as a condition to restarting a stalled $5
billion loan program.

Iljas said talks with IMF officials during the weekend
meetings had not included any additional negotiation on the
release of a $400 million tranche of money delayed since
December.

"We have already had meetings with the IMF mission (in
Jakarta). There was no extra detail discussed," Iljas said.

A high level IMF team left Jakarta last week saying the cash
tap would only be turned on if Indonesia's parliament passed a
revised 2001 budget slashing growth forecasts to 3.25-3.75
percent from five percent.

IMF Managing Director Horst Koehler added at the weekend that
restoring law and order was also vital.
Iljas said if non-economic risks were removed there would be less
pressure on the exchange rate, less pressure on inflation and
less pressure for monetary tightening at a time when the global
economy is slowing, leading many other central banks to lower
interest rates.

Some economists now argue that the most expedient way to
achieve rupiah stability is to impose capital controls, like
those in Malaysia.

But Iljas ruled out a shift from Indonesia's free float, which
he said was now enshrined in law.

"We do not think that way. For the time being I don't think we
need to change the system. Our main problem is not there, are
main problem is (politics)," he said.