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)