Central bank governor warns of price instability

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono warned yesterday that the high inflation rate in the first months of this year could endanger price stability and Indonesia's balance of payments.

"This year, the relatively high inflation rate serves as one of the indications toward the emergence of those problems," Soedjadjad said during a three-day workshop for officials of the Ministry of Trade here.

The workshop was opened by Minister of Trade Satrio B. Joedono yesterday.

Soedradjad said the inflation rate for the first seven months of 1995 had already reached 6.09 percent, as compared with 5.96 percent during the same period of last year.

The government has targeted an average annual inflation rate of five percent for the sixth Five Year Development Plan, which began in April last year.

In addition to the relatively high inflation rate, the central bank governor said that the high growth of imports could also contribute to an over-heating of the economy.

It is predicted that non-oil imports will surge further this year, in line with the country's robust economic activities. In step with the world economic recovery, Indonesia's non-oil exports are also expected to increase.

"However, the growth of both exports and imports will widen the deficits in service transactions. And the implication is that the deficit in our current accounts will likely be larger than that in the 1994-1995 fiscal year," Soedradjad said.

To counter that unwanted outcome, Soedradjad said that the monetary authority would maintain prudent macro-economic policies. Monetary factors, including money supplies both in narrow terms (M1) and in broad terms, or economic liquidity (M2), would be adjusted in accordance with the needs of the non- financial sectors, he added.

This year, the governor said, the government will maintain the targeted 19 percent growth level for money supply, 20 percent for economic liquidity and 19 percent for bank credits.

As the globalization of financial services continues, Soedradjad said, the banking industry of the future would be self-regulating, and the role of the central bank would be focussed on preventing banks from going bankrupt as a result of general economic risks.

He said that, in the long run, the central bank has to prepare consolidated banking supervision and a number of regulations to ensure level-playing fields for banking and non-banking financial activities.

In developed countries, he said, there is a strong tendency of conglomeration between banks and non-bank financial institutions. "Although such a tendency is not so strong in Indonesia, we have to anticipate it from now on."

As the competition between banks grows tighter, many banks take excessive risks and some even take fraudulent risks, Soedradjad said.

"Thus we have to continuously improve our banking regulations which, on the one hand, give freedom to banks to adjust themselves to current developments in the world banking industry and, on the other hand, provide sufficient warnings to the banks (so that) that they will do business in a prudent way," Soedradjad said.

The governor warned that the free entry-exit regime in the country's banking industry should be implemented with caution. "Because of the specialties in the banking industry, the scheme has to be implemented in a very careful way."

Soedradjad acknowledged that Indonesia's legal basis does not give substantial protection to depositors. He said that this situation made it important to establish a deposit protection institution to protect depositors in the event that their banks collapse or lose their banking licenses.

The establishment of such an institution is expected to redeem peoples' deposits if a bank goes bankrupt. The governor said that, if such an institution existed, regulatory authorities would "have more courage to revoke a bank's license if the bank was no longer competent to carry on banking activities." (rid/kod)