Distortions must be removed to restore rupiah stability

Distortions must be removed to restore rupiah stability

JAKARTA (JP): Economists warned yesterday the current
liquidity crisis could drag on and worsen if the government did
not abolish market distortions to facilitate the smooth
distribution of goods.

They saw the rebound in the rupiah rate over the last few days
(from its historic low last week) largely as a result of the
skyrocketing of Bank Indonesia Certificate (SBI) rates to 30
percent.

"The current financial crisis could worsen within the next few
months if the numerous market distortions such as monopolistic
practices are not removed," analyst Sjahrir told the Managing
Editors' Discussion Forum.

"Hence, I think, the government's long-awaited move to slash
the trading monopolies of the National Logistics Agency (Bulog)
is a key to normalizing the financial sector," Sjahrir added.

The rupiah, which rose 11 percent over the past two days on
the back of punitive interest-rate increases, slipped to 2,750
against the dollar from 2,670 at the previous day's close. It
closed at 2,700 yesterday.

In a related development, President Soeharto yesterday ordered
all cabinet ministers to closely monitor the developments in the
rupiah rate.

Coordinating Minister for Economy and Finance Saleh Afiff
announced Wednesday that he and several other ministers were
preparing a set of new measures to abolish Bulog's trading
monopolies in food commodities, except rice. The government plans
to end Bulog's monopoly in wheat flour, soybeans, sugar, garlic
and onions.

But Afiff admitted the cabinet had yet to reach a consensus on
the necessity of the planned bold measures.

Economists Sri Mulyani, Irzan Tandjung and Faisal Basri from
the University of Indonesia's School of Economics, who spoke at
the same forum, agreed the present financial crisis could not be
dealt with by simply tinkering with monetary policies.

"I wonder why the macropolicy making machinery has been
working overload while the micropolicy mechanism remains asleep,"
Mulyani said.

This anomaly, she said, has been responsible for the weak
competitiveness of the micro units of our economy.

Basri conceded that "for years we have been living with too
much complacency, languishing in comfort with our success in
steady high economic growth, in checking the inflation rate at a
single digit and managing our widening current account deficit
with capital inflows".

"We simply forget that our inflation has been higher than
other countries because our consumer price index is based on
higher prices. Our growth has been fueled largely by consumption.
The capital inflows have mostly been short-term funds which add
very little to our production capacity," Basri noted.

Sjahrir agreed, adding that "we now have to pay for what was
upheld by our monetary authorities almost to the point of a
paradigm that the rupiah's depreciation had to be lower than our
inflation rate".

"If you study the development of our rupiah rate after the
1986 devaluation, you will find that the rupiah depreciated by an
annual average of only 3.25 percent between 1987 and 1996," he
said.

The analysts called for public support of Minister Afiff's
team which is now preparing a new package of deregulations to
remove market distortions.

They said the liquidity crisis currently ravaging the economy
had led the government to a point of no return. The government
should push ahead with the long-delayed abolishment of all kinds
of market distortions, including institutional weaknesses and
administrative rigidities.

Sjahrir said monetary authorities could not sustain the
current tight monetary policy much longer without turning what he
called "a mini crisis" into an economic crisis.

"Significantly easing the money supply without gradually
freeing basic commodities to market forces could prolong the
currency crisis with a devastating cost to the macroeconomic
stability," Sjahrir said.

He said the monetary authorities should realize their
limitations.

"I don't think they can outsmart the market," Sjahrir said.

He cautioned that the credit crunch, if allowed much longer,
could drive many businesses to bankruptcy, thereby forcing a
large number of people out of work.

"If this happens, political stability will be affected in the
run up to the presidential election in March," Sjahrir cautioned.

Irzan Tandjung foresaw another threat from the large amount of
private sector's foreign borrowings which is to mature this year.

Sjahrir also observed that market expectations of the
country's economic outlook are no longer based on fundamentals
alone but have been influenced by other issues which previously
were not given much consideration.

"Such issues as good governance are now among the factors
which form the market expectations of an economy," he said. (vin)

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