BI urged to cut rates to revive economy

JAKARTA (JP): Prominent economist Sumitro Djojohadikusumo urged Bank Indonesia yesterday to cut interest rates in a bid to restore the ailing banking industry and revive business activities in the real sector.

The economic guru also suggested that the government provide various incentives to stimulate businesses, especially export- oriented ventures.

Those measures should then be followed up by efforts to restore public confidence in the government by improving its day- to-day services.

"The reform cabinet should not repeat various mistakes made in the past," Sumitro said at the Federation of Indonesian Employee Cooperatives' annual meeting yesterday.

He warned that the economy was on the brink of collapse and heading toward a long depression, which could require as long as five to seven years for recovery.

Efforts to arrest the economy's slide have been slow and have lacked in ministerial coordination over the last four months, making the recovery process longer and harder.

The rupiah has continued to weaken although Bank Indonesia (BI), the central bank, has kept interest rates high over the last two months.

BI's benchmark rate for one-month promissory notes (SBIs) currently stands at 58 percent per annum.

"What's happening now is that time deposit rates are soaring above SBI rates, making public funds expensive for banks. This has also pushed up lending rates and created difficulties for the banking sector to channel the funds except to buy SBIs," he said.

Almost all banks have been operating with a negative spread, he added.

If such a difficult situation becomes prolonged, more banks would need BI liquidity credit, which would deplete more of the central bank's cash reserves.

"There would be more banks for IBRA to supervise," he said.

The Indonesian Bank Restructuring Agency (IBRA) was established in January to help restore the country's ailing banks and recover BI's massive liquidity injections.

BI has reportedly funneled more than Rp 140 trillion (US$9.6 billion) in liquidity credits into troubled banks.

Sumitro advocated a cut in SBI rates to help businesses and the banking sector.

"The move would help strengthen the banking sector as well as encourage investment in the real sector."

Sumitro's prescription to treat the country's crisis-hit economy contradicts demands from the International Monetary Fund, which is championing a high interest rate regime to curb high inflation and stabilize the rupiah.

The IMF has organized a US$43 billion bailout package to salvage Indonesia's battered economy.

Sumitro also suggested the government establish a trust fund, to be initially established by setting aside $3 billion to $5 billion from IMF bailout funds, to help finance small enterprises and cooperatives.

The IMF has already disbursed $4 billion from its $10 billion commitment in the bailout package. It is expected to disburse another $1 billion soon.

Sumitro said his trust fund suggestion was based on the fact that small businesses and cooperatives would find it difficult to operate over the next two years.

"Small businesses and cooperatives have been badly hit by the fact that conglomerates have failed to service their foreign debts," he said.

The economy's meltdown was partly caused by an $80 billion overseas corporate debt, which has put tremendous pressure on the rupiah.

The trust fund could also be supplied by state firms. Cash from state firms could be pooled together into the trust fund rather than continuing with ineffective company schemes to help small businesses.

Sumitro said the trust fund should be organized by an independent body, in cooperation with the central bank, and lend money through healthy banks with an interest rate of less than 15 percent.

He said such loans would not cause an inflationary effect because the cash would go directly to the production system. (rei)