Govt allocates $5.5b to L/C guarantee plan

JAKARTA (JP): The government has pumped in US$5.5 billion to guarantee letters of credit (L/Cs) for local exporters hit by frozen international bank lines of credit, a director of the central bank said on Thursday.

The measure is part of the efforts to accelerate the recovery of the real sector badly hit by high interest rates, Bank Indonesia director Miranda Goeltom said.

"Until now there are seven L/C guarantee schemes which have been or will soon be operational," she told a seminar.

The schemes include government deposits in foreign banks as L/C guarantees.

Negotiations are ongoing with Germany, the Netherlands, China, Singapore and Brunei to also provide financing loans for Indonesian exporters to import raw materials, she added.

Plunging confidence in the country's troubled banking sector prompted international banks to reject local L/Cs. Bank Indonesia stepped in during the middle of this year by opening more than $1 billion in deposits at foreign banks to guarantee the L/Cs. The central bank signed an agreement in July with 21 local banks to provide Rp 2.5 trillion in government-guaranteed loans to exporters.

Miranda said other efforts to help revive the real sector included Rp 10.8 trillion in heavily subsidized loans, carrying an average interest rate of 16 percent, to be provided to small and medium companies and cooperatives.

She explained there had to be contingency efforts to boost certain sectors of the economy because the high interest rates would take time to be lowered.

"A preliminary study by Bank Indonesia shows that several sectors are quite eligible to be given the priority (for the credit assistance) because of their impact in employment creation and to the recovery of the economy."

Interest rates

She cited agribusiness, export-oriented industries, other promising sectors being battered by the sharp decline in the people's purchasing power and sectors with high ripple effects, including construction.

Despite the recent strengthening of the rupiah and positive developments in inflation, Miranda explained the central bank would resist drastically easing its tight monetary policy for the time being.

She said the pressure on inflation had not totally faded and the exchange rate of the rupiah was still vulnerable to developments in noneconomic factors.

"We won't give up to pressure for a drastic cut in interest rates even if we have to be confronted with demonstrators. I'd rather quit."

Bank Indonesia adopted the high interest rate policy to curb inflation and stabilize the rupiah.

The value of the rupiah against the U.S. dollar has dramatically increased in recent weeks, currently hovering around Rp 7,500 to the dollar, compared to more than Rp 11,000 last month and Rp 14,000 in June. The currency was at Rp 2,450 before the crisis started in July last year.

Inflation in September was 3.75 percent, compared to 6.30 percent in August. Bank Indonesia Governor expected inflation in October to be zero or dip into negative.

Miranda forecast a year-end interest rate level of 40 percent to 50 percent if developments in currency and inflation factors continued to be positive.

The benchmark interest rate on Bank Indonesia's one-month promissory note has declined from 70 percent last month to 56 percent on Wednesday.

The business community is pushing monetary authorities to lower the interest rates as the current level is the highest in the region. Some argue the rates must be below 25 percent for the business sector to run normally.

"The problem (of the real sector) will not be settled just by lowering interest rates. Don't look at the problem partially," Miranda said.

She argued the crisis in the banking and corporate sector had yet to bottom out. (rei)