BI will continue to defend ailing rupiah

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin pledged here on Friday to further defend the ailing rupiah, which has been under pressure in the past few weeks amid growing conflict among political leaders.

Sjahril said the central bank would use usual measures including intervention into the currency market and raising interest rates to halt the rupiah's fall.

"Bank Indonesia will continue to use the two usual measures ... If we think we need to intervene, we'll do so," Sjahril told reporters at the central bank office.

Sjahril made the statement amid criticism including from the House of Representatives that the market intervention and high interest rate measures have failed to stabilize the embattled rupiah, which dropped to a 31-month low of Rp 12,300 per U.S. dollar at one point on Thursday.

The rupiah gained ground on Friday to close at Rp 11,800 per dollar after several state-owned banks sold their dollars to defend the Indonesian currency.

"Don't look at the intervention as a means to eliminate the main factors causing the rupiah to weaken. The intervention is only meant to reduce the sharp fluctuation in the currency market," Sjahril said.

He explained that the current weakening of the rupiah was caused by a combination of domestic political uncertainty and economic problems particularly the uncertainty in the relations between the government and the International Monetary Fund (IMF).

The domestic political conditions have been shaken by the prospect of violence between the opponents and supporters of embattled President Abdurrahman Wahid as the House planned to issue a second memorandum of censure to the President next week, which may lead to his impeachment.

On the economic front, the government failed to reach a new agreement with visiting IMF special mission last week. The latter left the country after stating a precondition for signing a new agreement that the government must first obtain approval from the House over its proposed revision of the current 2001 budget.

The signing of the agreement would pave the way for the disbursement of the IMF's next US$400 million loan tranche to the country which was delayed late last year.

"As long as the rupiah remains under pressure, the interest rate may continue to increase," Sjahril said.

The benchmark interest rate of Bank Indonesia one-month SBI promissory notes has soared to 16.09 percent, a level which analysts say could spell new trouble to domestic banks. This will also increase the government's burden in financing the interest payment of the massive bank recapitalization bonds.

But Sjahril dismissed the concern. "According to the information I received, it (the 16 percent rate) was still a safe level... If pressure on the rupiah remained, the interest rate may still rise, but let's hope it won't," he said.

Sjahril said that it was crucial for the government to reach an agreement with the IMF because it would help revive investors confidence in the economy and help stabilize the local currency.

"The rupiah is currently undervalued, but whether it will continue to drop will depend on market confidence. If confidence remains weak, it's impossible to see a stronger rupiah," he said.

"I think reaching an agreement with the IMF is very crucial to revive confidence and lift the rupiah," he added.

During a meeting with Finance Minister Prijadi Praptosuhardjo late on Thursday, House leaders questioned the high interest rate policy adopted by the central bank to help defend the rupiah.

Head of the House Commission IX on state budget Benny Pasaribu told a press conference following the meeting that the high interest rate policy had been "too costly" to the country's economy and so far had not been effective.

Benny said that the House demanded the government talk with Bank Indonesia to design concrete measures to help strengthen the rupiah as a prerequisite for a speedy approval of the government- proposed revision of the current state budget.

The government plans to revise the current state budget as the various assumptions it is based on are no longer realistic due to the weakening of the rupiah and soaring interest rates.

The government plans to start the debating process on the budget revision with the House early next month and expects to reach a final agreement at the end of the month.

According to a government document leaked to the press, the new assumed rupiah-dollar rate in the revised budget is set at Rp 9,600 per dollar, while the SBI rate is set at 15 percent. The current budget sets the rupiah-dollar rate at Rp 7,800 per dollar and SBI rate at 11.5 percent. (rei)