BI urged to favor credit lines over market operations

JAKARTA (JP): Bank Indonesia (BI) should direct more liquidity to productive sectors through credit lines to reduce inflation and bank interest rates, economist Nyoman Moena said.

Moena, former BI director, said the central bank's current policy of market operation through issuing Bank Indonesia Certificates (SBIs) and buying commercial banks' money market securities (SBPUs) had failed to revive the dying economy.

"By using SBIs and SBPUs, BI could not monitor where the money goes. Once the money is disbursed, it may go to speculators," Moena said.

BI has pumped a huge amount of liquidity -- the total is estimated to be more than Rp 30 trillion (US$3 billion) -- to cash-strapped banks.

Moena said the market remained tight despite such a huge supply of liquidity, indicating that the money had gone to the wrong targets.

"Therefore it is high time for BI to channel the liquidity through credit lines so that it can monitor where the money goes and even direct where the money should go," he said.

BI could, for instance, direct more liquidity to export- oriented businesses by providing more rediscount facilities to banks which have extended credits to exporters.

BI could also direct liquidity to basic staple producers and distributors by extending them special credits through commercial banks.

"By channeling liquidity through credit lines, BI would not just monitor or direct where the money goes, therefore avoiding speculation, but also help to improve the country's economic capacity," he said.

Moena, Chairman of the Domestic Private Bank Federation's advisory board, warned that if the central bank adhered to its market operations through the SBI and SBPU policies, it would not be able to influence the market.

It would be almost impossible to bring down interest rates if liquidity remains tight and inflation soars, he said.

"Therefore, the central bank should focus efforts in supplying liquidity to the right targets and reducing inflationary pressures. This way, interest rates would go down," he said.

Meanwhile, businessman Fahmi Idris said high interest rates and the weak rupiah were the main culprits responsible for corporate bankruptcies and massive layoffs.

Fahmi, a Chief Executive Officer at the Kodel business group, warned that if interest rates rose further, due to the high inflation rate expected this year, and if the rupiah weakened further, there would be a "national collapse".

"If tight liquidity policy is maintained for too long and if the rupiah does not recover, surely it would force even more businesses to close. It could even lead to national collapse," Fahmi said.

The main task for the new cabinet would be to prevent such a national collapse and revive business activities by reducing interest rates and stabilizing the rupiah's exchange rate, he said. (rid)