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)