Capital inflows 'have destabilizing impact'

Capital inflows 'have destabilizing impact'

NEW YORK (Dow Jones): Although capital inflows will be crucial in reactivating the Indonesian economy, they can have a very destabilizing impact and need to be monitored, the head of the country's central bank said Friday.

"While a speedy recovery is highly desirable, we have to avoid falling in the same trap in the future," Sjahril Sabirin said in a prepared statement during a conference on Indonesia's economic outlook organized by the Asia Society.

"While we are fully aware of the importance of capital inflow...we have learned a lesson that short-term capital inflow can be volatile and destabilizing and therefore should be kept monitored and checked," Sjahril said.

In his statement, Indonesia central bank governor Sjahril reiterated that the government has put in place a system to monitor offshore liabilities of Indonesian companies.

"In the spirit of market-friendly policy, a (prudent) reporting system and external debt management are deemed necessary. In this respect, we introduced a reporting system on foreign liabilities in April this year," he said.

Indonesia's senior economics minister Ginandjar Kartasasmita earlier Friday told reporters in Jakarta that his government was consulting with the International Monetary Fund and the World Bank to gauge their views on a plan to better monitor the flows of capital.

Back in New York, the head of Indonesia's central bank stressed that his country had already introduced several legislative measures to revamp the country's economy.

"Notwithstanding the problems and sufferings we have had to go through, we have taken advantage of the opportunities arising from the difficulties to improve our economic, social, political and legal structures," he said.

Stressing the magnitude of the crisis hitting Indonesia, Sjahril said that the country's economy could contract by as much as 15 percent of gross domestic product in 1998.

The government's official forecast is for a 13.7 percent economic downturn for this year and inflation of 80 percent. But most recent data show that the Indonesian economy slumped 17.4 percent in the third quarter of 1998 alone.