BI urged to cut rates to revive economy
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)