BI to maintain tight monetary policy in 2001

JAKARTA (JP): Bank Indonesia (BI) Governor Sjahril Sabirin said on Wednesday that the central bank would maintain its tight monetary policy this year in a bid to achieve a low inflation target of 4-6 percent.

"We'll maintain our tight monetary policy to ensure long-term economic growth," he told a press conference.

Sjahril said that in order to achieve the core inflation target, the growth in base money should be checked within the 11- 12 percent range this year.

The central bank monetary policy is against government expectations of a lower interest rate this year, which is crucial to stimulate higher economic growth and reduce the state budget burden of the interest cost of government bank recapitalization bonds.

Another Bank Indonesia official said that the central bank would not sacrifice long-term benefit just to allow for lower short-term interest rates.

President Abdurrahman Wahid has been under strong pressure to show impressive performance in the economic field as he seems to be loosing ground in the political front.

But Sjahril said that the tight monetary policy would be managed in such a way so as not to stifle the current economic recovery process.

The government has proposed a bill to the House of Representatives which would amend the current central bank law, which critics said was merely designed to oust Sjahril and his deputies from their current posts.

The benchmark interest rate of the one-month Bank Indonesia SBI promissory notes increased to 14.84 percent at Wednesday's weekly auction from 14.73 percent in the previous week.

Bank Indonesia said that the interest rate on three-month notes rose to 14.79 percent from 14.31 percent at the last auction.

Sjahril added that Bank Indonesia has no specific target for the SBI interest rates.

Sjahril said that inflationary pressure this year would remain high due to the government plans to increase fuel prices and other government controlled prices as well as the salaries of government employees.

He added that the new regional autonomy policy, which gives greater power to provinces and regencies in managing their political and economic affairs, might also strengthen inflationary pressures, particularly if the local administrations rushed to impose higher taxes and fees which in turn would increase production costs.

He said that the likely impact of the fiscal decentralization might contribute another 2-2.5 percentage points to the central bank's core inflation target of 4-6 percent this year.

The government inflation target for 2001 is 7 percent.

Bank Indonesia forecasts economic growth this year to reach between 4.5-5.5 percent on the back of higher investments and exports.

"All sectors in the economy are also expected to post positive growth this year," Sjahril said.

The government assumes an economic growth of 5 percent in the current state budget, but the Coordinating Minister for Economy Rizal Ramli has said that the economy will be able grow much faster than the target set in the budget.

Preliminary official estimates put the economic growth last year at about a 5 percent, higher than the initial projection of 3-4 percent.

The economy contracted by nearly 14 percent in 1998 and grew slightly by 0.2 percent in 1999.

On the exchange rate of the rupiah against the U.S. dollar, Bank Indonesia expects the local unit to appreciate this year to a range of Rp 7,750-Rp 8,250 per U.S. dollar, compared to around Rp 9,400 on Wednesday.

Sjahril said that the uncertainty created by domestic political and security conditions would continue to affect the development of the rupiah.

"The pressure on the rupiah will continue, but overall the exchange rate of the rupiah is expected to strengthen," he said.

The rupiah has been under strong pressure over the past several months due to a combination of domestic political instability, huge corporate debt overhang and the strengthening of the dollar against most other regional currencies.

The rupiah ended at Rp 9,700 per dollar at the end of December, which was 27 percent lower than the level in January.

The currency is currently hovering at around Rp 9,400 per dollar.

The government assumes an average exchange rate of Rp 7,800 per dollar in the current state budget.

Elsewhere, Sjahril said that the above various economic targets could still be affected by various risk factors.

He said that the risk factors included the continuing uncertainty in the domestic political and security conditions which increased Indonesia's country risk, slow progress in the restructuring of corporate debts and in the recovery of the banking industry, the increasing state budget burden in servicing government debts and in covering subsidies and lingering legal uncertainty. (rei)