Central bank reaffirms realistic exchange rate

Central bank reaffirms realistic exchange rate

JAKARTA (JP): The governor of Bank Indonesia, the central
bank, reaffirmed yesterday the importance of maintaining a
realistic exchange rate of the rupiah.

"A realistic exchange rate policy is highly important,
especially in coping with the pressures on our balance of
payments and in checking the current account deficit," Governor
Soedradjad Djiwandono said after addressing a meeting of the
Indonesian Chamber of Commerce and Industry.

He said a realistic exchange rate would provide reasonable
incentives to industry to increase production, as their products
would be competitive on the international market.

Earlier on Tuesday, Minister of Finance Mar'ie Muhammad said
the depreciation of the rupiah against the American dollar would
be limited to between three and four percent in the 1995-1996
fiscal year beginning in April as it has been the case annually
over the past few years.

Soedradjad also re-emphasized the crucial need to keep the
current account deficit at a sustainable level. A country's
current account is the balance of its imports and exports of both
goods and services.

"Of no less importance is the prudent management of debt and
foreign reserves at a safe level," he was quoted by the Antara
news agency as saying.

The central bank governor acknowledged that in the 1995-96
fiscal year Indonesia's current account deficit might rise to
US$4.1 billion, or 2.3 percent of the gross domestic product,
from the $3.6 billion estimated for the current fiscal year.

The widening deficit, according to Soedradjad, is
unavoidable because of the large deficit in the service account
related to exports, which next fiscal year are projected to
expand by 16.5 percent, compared to an expected 15 percent
increase in imports.

"But the widening current account deficit should not cause
an inordinately great concern because it will not severely affect
the Indonesian economy," he noted.

No worry

Theoretically, Soedradjad said, the level of the current
account deficit should not be worrisome, provided that, as a
percentage of the gross domestic product (GDP), it remains below
the economic growth rate.

"But our economic growth rate is almost seven percent or
three times as high as the percentage of our current account
deficit against our GDP," he pointed out.

This situation, he said, is quite different from that in
Mexico, where the current account deficit is about eight percent
of GDP while economic growth is only around 2.9 percent.

The financial chaos in Mexico soon after the devaluation of
its peso last month had led foreign bankers and investors into
irrational speculation on the Indonesian currency last week,
thereby forcing the central bank to intervene to defend the
rupiah.

However, the currency market here had returned to normal on
Tuesday. The spot rates for the rupiah yesterday ranged from Rp
2,210 to Rp 2,211 per U.S. dollar, up markedly from Rp 2,285 on
Friday and Rp 2,215 on Monday.

Commenting on bank interest rates, Soedradjad foresaw an
upward trend this year because the projected robust growth of the
economy would increase the demand for funds.

Since the gap between domestic savings and investment is
relatively big, banks will tend to increase their interest rates,
he added.

Soedradjad said that domestic interest rates would also be
influenced by international interest rates, notably the tight
monetary policy of the American central bank. (vin)