Government to maintain current monetary policy

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)