BI to maintain tight monetary policy in 2001

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)