Govt urged not to maintain high rates for too long

JAKARTA (JP): The government should not maintain interest rates at the current high level for too long so that the business sector can expand and create employment, the Indonesian Chamber of Commerce and Industry (Kadin) said yesterday.

Aburizal Bakrie, chairman of the organization, said that Kadin cautiously welcomed Bank Indonesia's decision to raise benchmark interest rates by between 3 and 5 percentage points.

He said the chamber agreed with the central bank's argument that high rates were necessary to shore up the rupiah because the business sector could not function under the current volatile exchange rate environment.

"However, such a policy should only be temporary because the corporate sector can only thrive within a competitive interest rate environment," Aburizal added.

He called on the government to continue subsidizing credits for sound cooperatives and small business ventures to provide badly needed employment opportunities.

Bank Indonesia increased promissory note (SBI) rates by an average of 4 percent yesterday.

The one-month SBI rate rose to 50 percent, up from 45 percent. Overnight SBI rates rose to 44 percent from 40 percent, seven-day SBI rates to 48 percent from 43 percent, and 14-day rates to 49 percent from 44 percent.

The two-month SBI rate rose to 44 percent from 40 percent, the three-month rate to 34 percent from 30 percent, the six-month rate to 23 percent from 20 percent and the 12-month rate to 21 percent, up from 18 percent.

Both state and domestic private bank associations pledged yesterday that they would maintain their agreement under which member banks maintain deposit rates at no more than 5 percent higher than the benchmark SBI rates.

Publicly-listed Bank Bali was offering interest rates of 52.5 percent on one month deposits yesterday, 42 percent on three- month deposits, 28 percent on six month deposits, and 26 percent on one year deposits.

Banking expert I Nyoman Moena said the current high interest rates would definitely weaken the business sector and exacerbate the recession.

"The rate increase is yet another heavy blow to businesses and economic growth, but the step has been taken to boost the value of the rupiah," Moena said.

"When the situation allows, the authorities must reduce the rates to an acceptable level for business," he added.

He suggested that the government begin cutting rates when the second US$3 billion tranche of the $43 billion bailout package arranged by the International Monetary Fund for Indonesia is disbursed.

Aburizal said business in the real sectors would suffer from the high rates. Banks too, he said, would be unable to function as intermediary institutions.

"Excessively high rates make it impossible for banks to lend. Banks are therefore placed in a defensive position and are unable to generate profit," Aburizal said.

"Kadin hopes the government takes immediate action to restore banks' intermediary functions," he added. (rid)