Tue, 19 Dec 2000

Government asks BI not to push interest rate too high

JAKARTA (JP): The government asked Bank Indonesia (BI) on Monday not to allow domestic interest rates to soar too high because it would be counter productive to the country's economic recovery and endanger positive development in the banking sector.

Coordinating Minister for the Economy Rizal Ramli said that the central bank should not "over tighten" its monetary policy in its effort to help stabilize the ailing rupiah because other non- monetary factors were actually more dominant in causing the current weakening of the rupiah.

"We asked (Bank Indonesia) not to over tighten (its monetary policy) because the fluctuation in the rupiah is largely caused by non-monetary factors," Rizal told reporters following a meeting between Bank Indonesia board of governors and senior economic ministers including Minister of Trade and Industry Luhut Panjaitan and Finance Minister Prijadi Praptosuhardjo.

He said that the current political instability and currency speculation have caused the rupiah to weaken.

"Monetary solutions alone will not be effective in reducing the volatility of the exchange rate ... If the central bank rely too much on monetary policy it would only act as a brake on economic recovery," he said.

Bank Indonesia has said earlier that it would continue to tighten its monetary policy by allowing interest rates to increase as part of efforts to help stabilize the rupiah and curb inflationary pressure.

The benchmark interest rate on Bank Indonesia's one-month SBI promissory notes has kept soaring and reached 14.42 percent at last week's Wednesday auction.

The rupiah has been hovering at around Rp 9,500 per U.S. dollar lately, which is more than a 25 percent drop from the level in January this year.

Rizal said that a fair value of the rupiah should be at Rp 7,000-Rp 7,500 per dollar.

But Rizal declined to disclose to what level the central bank should allow its benchmark interest rate to increase. Bank Indonesia is an independent central bank.

Rizal said that the increasing interest rates would also endanger positive development in the banking sector.

He pointed out that domestic banks have started to improve with better capital conditions and a lower level of non- performing loans (NPLs).

The government has recently completed its bank recapitalization program boosting the bank's capital adequacy ratio to the minimum 4 percent level. According to the central bank ruling, banks must meet the minimum 8 percent CAR level by the end of 2001.

But experts have said that a continuing increase in domestic interest rates would hurt the banks and the business sector in their bid to restructure huge amount of NPLs.

Elsewhere, Rizal said that the country's economic condition has continued to improve this year.

He pointed out that the economy would grow by more than 4.8 percent this year.

He also said that the current account surplus for this year is estimated to reach US$7.7 billion compared to $5.8 billion in 1999.

He added that the balance of payments this year would top $5 billion, and foreign exchange reserves at more than $29.3 billion which was sufficient for financing more than six-months of imports.

Rizal admitted, however, that there was strong inflationary pressure this year though fortunately food inflation was negative throughout the year making inflationary pressure have less of an impact on people.

He said that the high inflationary pressure was largely due to imported inflation because of the weakening of the rupiah against the U.S. dollar.

The domestic production system depends heavily on imported raw materials, which creates inflationary pressure each time the rupiah weakens.

The government initially forecasted inflation this year to be in the range of 5-7 percent, but Bank Indonesia officials said recently that inflation this year was likely to be in the range of 9-10 percent.

The central bank also said that inflationary pressure would continue in 2001 with the planned increase in fuel prices and higher salary policy.

Meanwhile, Bank Indonesia said in a press statement that the result of a joint meeting with the government would become an input for the central bank in designing its monetary target for 2001. (rei)