BI to maintain tight monetary policy in 2006
The Jakarta Post, Jakarta
Bank Indonesia will maintain its tight monetary policy next year to curb inflationary pressure, the central bank's governor Burhanuddin Abdullah said on Wednesday.
Speaking a day ahead of the expected release of inflation data for November, he said the cost of living was likely to remain high next year due to a fuel price hike in October as well as other price hikes.
"In response to this, Bank Indonesia expects to maintain its tight bias monetary policy for now," Abdullah was quoted by Agence France-Presse as saying at a seminar hosted by University of Indonesia's School of Economics.
Bank Indonesia has been steadily raising its key interest rate this year to ease inflation and defend the rupiah. Its one-month benchmark rate now stands at 12.25 percent, compared to 7.42 percent in January.
The government raised fuel prices on Oct. 1 by an average of 126 percent to relieve some of the pressure caused by crippling state fuel subsidies after global oil prices struck historic highs.
The hike drove October inflation up 8.7 percent month-on-month and 17.89 percent from a year earlier. The results were much higher than expected.
"Until August next year, year-on-year inflation should stay at about 15 percent," Abdullah said, adding that the central bank's "key interest rate will follow inflation."
He said he expected inflation to drop after August, bringing full-year 2006 inflation to seven percent to eight percent. Speaking at the same seminar, State Minister for National Development Planning Sri Mulyani Indrawati noted that the government would match Bank Indonesia's tight monetary policy with more government spending to keep economic growth on track.
"In the fourth quarter of 2005, growth tends to slow down as a result of high inflation. We will reverse this with more fiscal spending," Sri Mulyani said.
She explained that increased government spending would extend to the first quarter of next year using funds carried over from the 2005 budget.
She noted that the government had plenty of unspent money from the 2005 budget due to late disbursements as a result of repeated budget amendments at the legislature.
As monetary policy would remain tight until the third quarter of next year, the government will match it with more expansionary fiscal spending until then by implementing planned development projects in the 2006 budget.
"As a result, the deficit is expected to be slightly higher than that stated in the 2006 budget, but such an increase in the budget deficit would remain within our debt sustainability corridors," Sri Mulyani said, adding that the deficit would be maintained at below 1 percent of the gross domestic product (GDP).
Sri Mulyani explained that the government would finance the deficit by mostly issuing government bonds, on both the domestic and foreign markets, as the country could no longer rely on foreign loans. The amount drawn on foreign loans next year will be lower than government spending on foreign debt repayment, Rp 35.1 trillion (about US$3.5 billion) as against Rp 63.6 trillion.
Despite the issuance of new debt, the minister explained, the government would keep its long-term commitment to bringing down its debt stock from the current level of about 48 percent of GDP to 39.5 percent in 2007 and 31.8 percent in 2009.