Government to maintain current monetary policy

JAKARTA (JP): The government affirmed on Friday it would continue its high interest rate policy with the aim to ensure the quick reduction of inflation and the strengthening of the rupiah.

"We intend to continue to implement a firm monetary policy, consistent with the monetary targets already established as part of our program," the government stated in the new Supplementary Memorandum of Economic and Financial Policies (MEFP) agreed with the International Monetary Fund on Friday.

It was attached to the Letter of Intent on the IMF-sponsored program, which was addressed to IMF Managing Director Michel Camdessus in Washington, D.C., by Coordinating Minister for Economy, Industry and Finance Ginandjar Kartasasmita on the government's behalf.

The document added that interest rates were expected to decline gradually as inflation subsided and the rupiah "remains in line with the program path".

Completion of the monthly review program this week paved the way for the disbursement of another US$1 billion of the IMF's $11 billion contribution to Indonesia's bailout program, of which about $5.9 billion has been disbursed.

The IMF-lead economic program targets the rupiah reaching Rp 10,000 to the U.S. dollar by the end of this year, with an accompanying inflation rate of about 80 percent.

Stability of the exchange rate is the cornerstone of the economic reform program.

The rupiah has lost about 80 percent of its value since it started its free fall in July last year.

The IMF has championed the high interest rate regimen to strengthen the currency and curb soaring inflation.

The business community and bankers have appealed to the government to loosen the tight monetary policy because it has failed in both of the declared aims. Dire ramifications for the real sector have included lending rates soaring to more than 70 percent and the banking sector threatened by a negative spread.

"Monetary policy has been in line with the program, and the fiscal balance is well within the program limit," the MEFP said.

The rupiah rallied to between 10,000 and 10,500 to the dollar in recent weeks, up from about 13,000 in August.

But the currency plunged to hover around the 12,000 level this week due to anxiety over major demonstrations and rioting in several parts of the country in the wake of sharp increases in prices of food staples, especially rice.

The government avowed on Friday it would proceed quickly with its bank restructuring program to drum up further confidence in the beleaguered currency.

"We intend to proceed quickly with the issuance of government bonds needed to finance bank restructuring operations," the MEFP said.

The troubled banking sector is enduring painful rehabilitation measures, bound to be extremely costly especially due to the non- performing loans (NPLs) estimated to reach 50 percent of the more than Rp 600 trillion in outstanding bank credits.

They will be absorbed by the state-sponsored asset management unit (AMU) of the Indonesian Bank Restructuring Agency, which will purchase them from the banks through the issuance of government bonds.

The MEFP stated that a final plan for the restructuring and recapitalization of Bank Danamon, Bank BCA, Bank Tiara and Bank PDFCI -- all of which were nationalized on Aug. 21 -- would be prepared by Sept. 30, 1998.

"We intend by Sept. 21 to complete negotiations with the former owners of large banks for the repayment of Bank Indonesia liquidity support."

The government also suspended the operations of three banks last month. The owners have promised to repay liquidity credit received from the central bank with a combination of cash and assets by the Sept. 21 deadline.

The government promised that its fiscal policy would be supportive of efforts in curb inflation and stabilize the currency.

"We are taking steps to ensure that fiscal policy is as supportive of recovery as programmed."

It set the target of net domestic assets (NDA) -- the difference between reserve money and net international assets -- for October, November and December at minus Rp 61.7 trillion, minus Rp 56.2 trillion, and minus Rp 50.9 trillion.

Base money for the months was targeted at Rp 71.5 trillion, Rp 73 trillion and Rp 74.3 trillion respectively and BI liquidity support at Rp 173.6 trillion, Rp 174.1 trillion and Rp 174.6 trillion.

Net reserves are targeted at $13.3 billion, $12.9 billion, and $12.5 billion for the corresponding months. (rei)