Economy may improve soon: Syahril

YOGYAKARTA (JP): Bank Indonesia (BI) Governor Syahril Sabirin has expressed optimism that the economy will improve within the next two to three months if "non-economic factors" in the country stabilize.

"If conditions stabilize, I would expect interest rates to be cut and the rupiah to strengthen to between 6,000 and 7,000 per U.S. dollar," Syahril told reporters at a seminar here on Saturday.

The rupiah closed at 11,200 against the U.S. dollar last week compared to its pre-crisis level of around 2,450 in July last year.

Trading on the currency was relatively quiet last week due to increasing concern over political instability.

Sjahril said that demonstrations in various cities across the country had been partly responsible for the weakening of the rupiah.

Currency traders mostly agreed with Sjahril and blamed increasing social unrest for the most recent fall in the rupiah. They said fear of instability had kept offshore operators out of the market.

Social tension has risen considerably over the past two weeks and riots sparked by food shortages have erupted in several towns across the country.

Syahril stressed on Saturday that Indonesia would not copy Malaysia and implement currency controls, saying the move would hinder the flow of capital into the country.

"Any such move would prevent both domestic capital and foreign capital which has left the country from returning," he said.

Controls on the exchange rate would also need a strong and complex administrative system and very tight supervision.

"If there was any leakage or irregularities in the system, the impact on the country would be very damaging," he said, adding that this would cause the rupiah to weaken even further.

Syahril said the government would minimize the negative impact of a freely floating foreign exchange regime by limiting forward sales of the currency and prohibiting the provision of credit to non-residents.

He said the government also needed to strengthen the system used to monitor the flow of capital into and out of the country to lower the risks associated with the current exchange rate regime.

Rumors that Indonesia would introduce capital controls have caused concern in the local and regional stock markets since Malaysia introduced similar controls earlier this month.

Sjahril stressed that the government would persevere with the current system and would not resort to fixing exchange rates at pre-determined levels.

"In this condition, maintaining a floating exchange rate is important because it signals that the government is being consistent with its policies," he said. (23/44/das)