BI to keep money policy prudent

JAKARTA (JP): Bank Indonesia, the central bank, will maintain the country's prudential monetary system despite encouraging development in the country's macro-economy during the first eight months of this year.

Central Bank Governor J. Soedradjad Djiwandono said here yesterday that the overall macroeconomic conditions have been relatively stable in the first eight months of this year.

"Inflation has been kept under control in the past eight months while signs of economic recovery continued," he told a business luncheon held by the Indonesian Executive Circle.

However, the governor warned the government and the private sector to be cautious of another overheating condition.

"We all want the Indonesian economy to grow but the growth should be sustainable, without overheating," he said, adding that this condition hit Indonesia in 1990, severely hurting the country's economy.

The tight monetary measures taken in 1990 by the government to squeeze economic liquidity had caused an increase in deposit rates to over 28 percent per annum, partly leading to the collapse of business activities in certain sectors and also sharp increases in unperforming loans in both state private banks.

Soedradjad said that at the macro-economic level, the monetary policy taken in 1993 and the early part of this year was aimed at sustaining macro-economic stability and at the same time supported the process of economic recovery.

"In this regard, we are aware that we have to maintain prudential principles as a basic foundation of fiscal and monetary actions," he said, adding that the prudential principles require the central bank to maintain the growth of money supply and credit "at levels consistent with overall macro-economic stability."

Business analysts project the country's economic growth at 6.7 percent this year, slightly above the government's projection of 6.2 percent.

Yardstick

The central bank governor said that there is no proper yardstick that could be applied to measure suitable economic growth for Indonesia.

"It depends on supply and demand," he answered, when asked if the economic growth of seven percent could lead to an overheating of the country's economy.

Speaking about challenges, Soedradjad said that the task of the central bank will be more difficult in the coming years not only due to an increase in bad debt problems in state and private banks but also due to more diversified banking products and the introduction of more developed financial instruments.

"Thus, in formulating monetary policies we have to consider not only development of the banking sector but also the development of other financial instruments," he said.

Soedradjad said that the foreign exchange market was better developed after the central bank further widened the bid-offer spread (band) for the exchange rate.

After being widened in December 1993, the spread between buying and selling rates was widened again early this month from one percent of the central rate to 1.5 percent.

He said that the widening of the spread has encouraged long- term currency trading. In addition, it has given the central bank more room to absorb short-term capital flows that might destabilize the economy.

"At present, the central bank has more room to intervene in the market in order to secure the value of the rupiah at a realistic level," he said, adding that widening the band is also a crucial step in safeguarding the central bank's prudential policy as a wider band will transfer more risk to short-term speculators and thus deter short-term inflows.(hen)