IMF tells Indonesia to cut interest rate, do more to relax money supply
IMF tells Indonesia to cut interest rate, do more to relax money supply
JAKARTA (JP): Indonesia has to allow domestic interest rates
to further decline from current levels as part of a strategy to
encourage an economic recovery, according to International
Monetary Fund (IMF) Asia Pacific director Hubert Neiss.
He also said on Tuesday that a relaxation of monetary supply
growth would be required as the demand for credit returns.
"This process has to be carefully managed so as not to
jeopardize stability in the foreign exchange market and to allow
some further appreciation of the rupiah," he told a gathering of
business executives and economists.
Bank Indonesia has gradually allowed the benchmark interest
rate its 1-month SBI promissory note to decline from over 70
percent in August 1998 to the current level of 22.5 percent.
The interest rate decline has not weakened the exchange rate
of the rupiah against the U.S. dollar because of improving
political and economic conditions, particularly concerning
inflation rates.
Bank Indonesia has announced the target for its benchmark
interest rate at between 17 and 20 percent by the year's end.
Neiss also said that an expansionary fiscal policy, with
larger budgetary spending on socially related programs, like
education and employment-creating investment, was also needed to
achieve an economic recovery.
"The resulting fiscal deficit has to be financed by external
aid so as to maintain domestic financial stability and contain
the debt-service burden of the government," he said.
Neiss also said that since the banking and corporate sectors
had been seriously damaged by the economic crisis, the government
had to immediately focus on accelerating the restructuring of the
banking system and corporate sector to revive credit flows and
make the recovery durable.
"Only with successful restructuring will the banks be able to
restart lending on a major scale to finance an expansion of
production," he said.
The government has taken various restructuring measures
including bank closures, mergers, take-overs and
recapitalization.
Neiss said that the latest estimate of the country's bank
restructuring cost was around 40 percent of gross domestic
product.
"The restoration of a sound banking system is vital of the
economy, and the large expense by the government for its
recapitalization is simply unavoidable," Neiss said.
But he explained that the cost would be reduced as the
Indonesian Bank Restructuring Agency (IBRA) recovers bad loans
owed by businessmen to the recapitalized banks or closed-down
banks.
IBRA is expected to accumulate over Rp 230 trillion mostly in
non-performing loans of major domestic banks. The agency intends
to reach loan-workout agreements with the bank debtors by the end
of August, or otherwise start litigation measures.
IBRA is currently focussing on restructuring bad loans owed by
the country's 200 largest debtors, mostly companies belonging to
well-connected businessmen.
Neiss said that the restructuring of the corporate sector
would focus on restructuring its domestic and external debts, as
well as management restructuring and eliminating excess capacity.
"Only with progress in corporate restructuring will
corporations find lenders willing to finance new investment," he
said.
Neiss stressed the importance of a credible bankruptcy court
to accelerate corporate restructuring, saying both creditors and
debtors understood they would lose if bankruptcy and liquidation
proceedings are taken only as a last resort.
"A credible bankruptcy court cannot be achieved overnight, and
a sustained effort must be made to push ahead with the measures
the government has already initiated," he said.
Neiss said the government's macroeconomic stabilization policy
and the bank and corporate restructuring programs had showed some
positive signs, including a strengthening of the rupiah,
declining interest rates, lower inflation, and positive output in
the first quarter of this year.
"While we're not out of the woods yet, there is every reason
to believe that, with the return of political stability,
Indonesia's recovery will catch up with the rest of Asia. The
most important reason for this belief is that there is a broad
consensus across the political spectrum of the recovery
strategy," Neiss said, pointing particularly to bank and
corporate restructuring programs.
The IMF's first managing director, Stanley Fischer, held a
marathon meeting on the weekend with Indonesia's top political
leaders, who assured him of their commitment to the IMF-sponsored
economic programs.
"The recovery should not make us complacent or overconfident,
and lead to a return of business as usual," Neiss warned,
pointing out that more measures would have to be introduced that
would make the economic system more efficient, resilient and
egalitarian.(rei)