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