'Fall in SBI rate good for budget, economy'

The Jakarta Post, Jakarta

Minister of Finance Boediono said on Friday that the current drop in the central bank benchmark interest rate would have a positive impact on the state budget and the overall economy.

"This will certainly have a good effect on the overall economy, the banking industry, the private sector and the government," he said.

The interest rate on Bank Indonesia one-month SBI promissory notes is now at a historic low of 9.71 percent as the central bank aggressively cut the rate during the past year amid a benign inflationary environment and the stronger exchange rate of the rupiah against the U.S. dollar. The rate was more than 13 percent earlier this year.

There is still a chance that the SBI rate could drop further, as stated by Bank Indonesia Governor Burhanuddin Abdullah earlier this week, as long as inflation remains low.

Boediono said that the lower rate would help reduce the government's burden in servicing its huge domestic debts, mostly in the form of bonds worth around Rp 435 trillion issued in the late 1990s to bail out ailing banks. The interest rate of a large part of the bonds is linked to the SBI rate.

The lower the rate, the less money the government has to allocate for such payments. One estimate says that a 1 percent decrease in the SBI rate means that the government could save up to more than Rp 2 trillion.

Some Rp 55.1 trillion of the 2003 state budget has been earmarked for servicing the interest of domestic debts.

But it now seems very likely that the amount needed will be much lower, providing grounds for Boediono to remain optimistic about achieving this year's deficit target of 1.8 percent of the GDP, or some Rp 34.4 trillion.

There were worries earlier that the deficit could be higher as revenue, particularly from privatization proceeds, would likely be lower than the target due to problems in carrying out the program.

Maintaining a state budget deficit at a safe level is key to ensuring macroeconomic stability.

Boediono also said that the lower SBI rate should push lending rates lower and make bank loans cheaper for the corporate sector.

This would also force banks to resume an intermediary role, instead of remaining reluctant to channel their money to the corporate sector.