BI warns of economic overheating

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono warned yesterday that the country's economy is running an increasing risk of overheating.

"We have felt indications of an overheating economy since last year," Soedradjad said in his keynote speech to a seminar on Indonesia's banking and financial sectors.

Soedradjad added that last year's inflation rate approached the double digit level, at 9.24 percent, and the current account deficit reached US$3.1 billion.

Although the inflation rate for the first nine months of this year was only 6.79 percent, as compared with 7.38 percent for the same period of last year, the current account deficit is expected to expand further as a result of an increase in imports, the growth of which has been much higher than the growth of exports.

During the January-August period of this year, exports grew by 18.4 percent, as compared with 15 percent during the same period of last year, while imports grew much more strongly, at the rate of 28.9 percent.

Soedradjad said that this year's high growth of imports was fueled by increasing domestic consumption as well as by expanding investment activities.

"We are optimistic that we can curb this year's inflation rate. However, our current account deficit is increasing this year," Soedradjad said.

He added that the deficit is still manageable, as it will be offset by an influx of foreign capital through direct investment, portfolio capital and official and private loans.

Soedradjad cautioned that the influx of foreign capital would cause additional pressures on the country's money supply, which is already expanding as result of rising bank credits.

Bank credits had already reached Rp 216 trillion ($95 billion) as of August.

Soedradjad gave assurances that the central bank would continually improve the effectiveness of its market instruments in managing the money supply, both in narrow terms (M1) and in broad terms (M2).

"As the effects of our instruments are indirect, we have to use market-friendly instruments, which are accepted by the market," Soedradjad later told journalists.

Those instruments include Bank Indonesia certificates (SBIs), short-term securities (SBPUs), exchange rate band and moral suasion.

Soedradjad predicted that annual growth of the money supply would remain high this year. The annual growth of broad-term money supply as of August reached 27.1 percent.

The central bank was successful in confining money supply expansion in broad terms to 21.5 percent in the 1994/1995 fiscal year, which ended in March, as compared with 22.2 percent in the previous fiscal year.

As the globalization of the financial market continues, Soedradjad warned that financial crises, such as that which struck Mexico earlier this year, could hit any emerging market that did not prudently manage their macro-economic aggregates.

"Under these financial market conditions, an incident like the Mexico crisis could happen any time in the future. This reality underlines the importance of a prudent monetary management," the governor said.

He said the monetary authority would maintain prudent macro- economic policies, adding that monetary factors, including M1 and M2, would be adjusted in accordance with the needs of the non- financial sectors. (pwn/rid)