BI to keep money policy prudent
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)