Budiono warns against overconfidence

JAKARTA (JP): Chairman of the National Development Planning Board (Bappenas) Budiono warned on Monday that signs of quicker than expected economic recovery should not be cause for an undue sense of complacency.

He stressed the government would remain cautious in its fiscal and monetary policy, including the issue of lowering interest rates.

The considerable strengthening of the rupiah against the U.S. dollar in recent weeks was part of a chain process leading to economic recovery, he said. Currency appreciation will reduce inflation, lower interest rates, reactivate economic activities, raise employment and the supply of goods, which in turn will further lower inflation, and so on.

"If this chain process can be maintained, the economy will recover," Budiono told journalists after meeting with a group of U.S. defense and security officials.

He said that creating political and social stability was essential in maintaining the flow of the recovery chain process.

"The important thing is the social and political situation.

"On the economic front, I think we're already on the right track."

The rupiah has appreciated by about 40 percent during the past weeks, closing at Rp 7,400 to the dollar on Monday,

The currency was still at more than Rp 11,000 last month, compared to more than Rp 14,000 in June following the social riots in May that led to the downfall of Soeharto.

About 2,450 in July last year before the crisis started, the rupiah hit a historic low of 17,000 in early January.

Strengthening of the rupiah is the cornerstone of the country's economic reform program, which is sponsored by an International Monetary Fund multibillion dollar bailout.

IMF Asia Pacific Director Hubert Neiss said recently that the country would record positive economic growth in the second semester of next year, sooner than an earlier forecast for the year 2000. The economy is expected to contract by 15 percent this year.

"The exchange rate of the rupiah seems to be improving faster than expected. But we still have to be careful, don't make reckless (deeds)... the rupiah is still fluctuative," Budiono said.

He stressed that the monetary authority would not be in a hurry to lower interest rates because such a move could backfire if the macroeconomic condition was not supportive.

"Lowering the interest rates will depend on the market's perception. If we move against the market, it could backfire."

Public expectations of inflation are still high, he said, and a drastic reduction in interest rates would only push up the inflation level because people would opt for consumerism over savings in bank deposits.

"Our wish is to lower the interest rates. But this will depend on the market."

The business sector and banking industry have called on the central bank to immediately lower interest rates in the wake of the strengthening of the rupiah.

Bank Indonesia has lowered its benchmark one-month promissory note (SBI) interest rates by more than 10 percentage points over the past couple of weeks to around 58 percent, still the highest in the region.

Budiono also said that the government's plan to boost its social safety net spending for the poor in the second semester of the fiscal year ending in March 1999 would not cause expansion in the monetary and fiscal indicators beyond the IMF targets.

Spending for the poor, amounting to 7.5 percent of GDP, has been slower than planned due to worries over leakages and the possibility of malfeasance. (rei)