Central bank governor warns of price instability

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)