BI will continue to defend ailing rupiah

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)