Current monetary policy expected to be maintained

JAKARTA (JP): The current monetary policy will remain for the foreseeable future even though there will be cabinet changes next year, according to a senior economist.

Sjahrir said Saturday that the new cabinet would, for example, maintain the managed floating exchange rate to keep the rupiah within a realistic range.

"With the system (of the managed floating exchange rate), Indonesia has successfully overcome the frequent speculative assaults on the rupiah," he told a seminar on strategies to become successful businessmen.

Sjahrir said that the recent attacks on the rupiah, which forced Bank Indonesia (the central bank) to intervene in the market, did not cause the country's currency to drop as low as Thailand's baht or the Philippines' peso.

"However, due to the rupiah panic on July 21, we can be certain that the rupiah's depreciation against the U.S. dollar will be higher than the government's original target of between 5 percent and 6 percent per year," he said in his paper on the prospects of the Indonesian economy in the era after the general assembly of the People's Consultative Assembly (MPR).

The MPR, comprising all 500 members of the House of Representatives and 500 representatives of various groups, professions and regions, meets in March to elect the President and Vice President. It will also establish the five-yearly state guidelines.

Sjahrir said that the middle rate of the rupiah was projected to reach 2,580 per dollar by the end of 1997 and about 2,734 by the end of 1998.

With such figures, Indonesia would find it tougher to reach a per capita income of US$2,300 by 2005, as projected by the World Bank.

Sjahrir said that the per capita Gross Domestic Product (GDP) would be only around $1,300 in 1998. Though the per capita GDP, in terms of rupiah, will increase by 16 percent in 1998, it would only increase by 9.4 percent in terms of the dollar (at its present value) due to the faster depreciation of the rupiah against the dollar.

"In 1997, the country's per capita income, in rupiah, is estimated to rise by 16 percent, while in dollars the increase will be only 4.3 percent," he said.

Sjahrir rated the government as being "very experienced" in taming speculative attacks on the rupiah. The government was forced to devalue the currency in 1971, 1978, 1983 and 1986.

"Based on the facts, the monetary authorities will be extra cautious on their conversion rate policy. The devaluation, particularly the one in September 1986, was a bitter experience for both the public, who thought that they had been cheated at the time, and the government itself."

Since then, according to Sjahrir, the monetary authorities have become more flexible.

"For instance, Bank Indonesia has expanded the intervention band of the currency several times. In July the band was widened to 12 percent from 8 percent to reduce the number of speculative attacks on the rupiah."

Indonesia's exchange rate policy is different from those adopted by Thailand and the Philippines, which pegged their currencies to the U.S. dollar before devaluing them last month, after finding their currencies over valued.

"Many people are still worried that the speculative attacks will continue and then the related question now is what the central bank will do if it fails to tame the assault," he said.

"There is only a small possibility Bank Indonesia will devalue the rupiah if it fails in its intervention because devaluation will hamper the country's economy, especially when Indonesia has to repay its increasing overseas debts."

"If the governor of Bank Indonesia and the minister of finance in the next cabinet are also conservative, cautious and not fond of surprises, they will possibly widen the spread of the intervention band. With a broader (intervention) band, the rupiah will move more flexibly and discourage speculators from attacking the currency."

Sjahrir estimated economic growth in 1998 would reach 7.8 percent, a bit higher than the 7.7 percent projected for 1997. (icn)

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