Indonesia's economy heading for stagnation, says Miranda

Indonesia's economy heading for stagnation, says Miranda

JAKARTA (JP): Current indicators show that Indonesia's economy
is deteriorating into stagnation which, coupled with current
political uncertainty, will limit the economic tools available to
lift the country out of the economic crisis, Bank Indonesia
director Miranda Gultom said yesterday.

She said that based on statistical convention, an economy
which experiences negative growth for two consecutive quarters
was defined to be in a stagnation.

Miranda said Indonesia's gross domestic product in this year's
first quarter declined more than 6 percent and added "it's clear
that there will be negative growth in the second quarter."

"The economy is like a hollowing tree," she told a seminar.

The economic assumptions in the 1998/1999 state budget
generated in April are no longer realistic since inflation may
surpass 80 percent and the economy could contract more than 10
percent, she said.

She also argued that the 1998 year-end exchange rate target of
Rp 6,000 to the U.S. dollar was no longer realistic.

"This problem is further complicated by the country's
political developments."

She stressed, however, that despite the hurdles, the
government had to make best of the economic tools in its control
to prevent the economy from further deteriorating.

Efforts to control inflation and stabilize the rupiah will be
increasingly dependent on the central bank's tight monetary
policy because the government's expansionary fiscal spending is
unavoidable, she said.

She pointed out that a larger budget deficit than previously
projected was inevitable due to greater subsidy spending
resulting from a further depreciation of the rupiah, while at the
same time tax revenue would likely be less than estimated.

"This is why we will maintain a high interest rate policy,"
Miranda said.

BI's high interest rate policy, however, is not supported by
the House of Representatives (DPR) which has urged significant
reductions in the central bank's benchmark rate from as high as
58 percent at present.

"Reducing the rates would give a wrong signal to the financial
market," she said, pointing out that the market expected a tight
monetary policy amid an expansionary fiscal policy.

She added that lower interest rates would only prompt people
to accumulate goods and purchase foreign currency to hedge
against increasing inflation and political uncertainty.

She said the central bank, however, would provide more
concessional credits to small businesses, which would help revive
the production and distribution system for essential goods and
provide employment.

The policy is expected to help curb inflation and prevent
social unrest, she said.

She also said BI would continue injecting liquidity into
troubled banks in support of the government's bank guarantee
policy to prevent an overall collapse of the country's banking
system.

She added that the central bank would soon help domestic banks
repay their trade financing debts of more than US$1 billion to
overseas banks.

"This is a condition for the restart of the trade financing
facility to the country as agreed to in last month's debt talks
in Frankfurt.

"All these steps must be carried out consistently, meaning we
cannot meet the wishes of all parties at the same time."

She said the political uncertainty must also be solved because
noneconomic factors were playing a large role in the crisis.

"When the party's over, the mess has to be cleaned up." (rei)