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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