Consequences of high interest rates

Consequences of high interest rates

This is not the first time the government has followed a
policy of raising bank interest rates. When the government in
August last year abandoned the intervention band that allowed the
rupiah's value against the U.S. dollar to fluctuate within
certain limits, then Bank Indonesia governor J. Soedradjad
Djiwandono warned the community that it should be ready to accept
whatever risks the move might bring. It is therefore natural that
all parties concerned, businesspeople included, should accept
high interest rates as one of those consequences.

In order to counterbalance the community's present tendency to
keep money circulating outside the banking system -- to the tune
of trillions of rupiah -- the government is correct in adopting a
strategy of setting such high interest rates on bank deposits.
Depositors will naturally welcome such relatively high interest
earnings while their money is kept safely in local banks.

Another positive effect is that foreign investors,
particularly fund managers, will be eying Indonesia again as an
investors' paradise. This poses a challenge for the ministers of
the present Seventh Development Cabinet, who must be able to
maintain a proper equilibrium so that the incoming funds may be
properly allocated as direct investments, at least in the longer
term, in productive sectors.

In the absence of a conducive business climate and without
efforts to establish a clean and reputable government as part of
our economic and political reform measures, it is to be feared
that the resulting capital will be of a temporary and short-term
nature, and aimed at reaping immediate profits only.

-- Bisnis Indonesia, Jakarta