Inflation has Indonesians converting to dollars

JAKARTA (JP): High inflation in the first three months of this year has encouraged people to deposit their money in U.S. dollars rather than rupiah to avoid losses from the Indonesian currency depreciation, according to bank executives.

The inflation rate has increased from 1.25 percent in January to 1.76 percent in February before falling back to 0.7 percent in March. This puts inflation in the first quarter of this year at 3.71 percent, making the government's estimate of a year end rate of five percent unrealistic.

"Deposits in the dollar have continued to grow in the last two months," an executive of Bank Bali said.

Executives of other major commercial banks have a similar view of the trend depositors.

However, increases in the value of the time deposits in American currency in foreign banks was not as significant compared to those in local banks.

"Our interest rate (on dollar deposits) is lower than domestic banks and I think this is the reason why people prefer to deposit their dollars in local banks," an executive of Standard Chartered Bank.

Depreciation

Kiki Handijaya, a director of Modern Bank, said the government's proposal to depreciate the rupiah against the dollar at around six percent has fueled the demand for dollar.

"There is a rush to buy dollars as the people convert their time deposits to U.S. currency," he said.

He said if the depreciation of the rupiah against the dollar rises to six percent this year from 2.33 percent in 1993 and the inflation reaches above nine percent, the people will get no profit from interest bearing rupiah accounts.

The interest rates of the time deposits in rupiah offered by major banks are between eight and nine percent per annum or almost the same level of the 1993 inflation rate, which reached 9.77 percent.

Bank analysts said that the people will get nothing but losses from their rupiah deposits if the inflation rate reaches as high as that in 1993.

"If the interest rate is nine percent and the inflation is also nine percent, you will suffer a loss because you have to pay a 15-percent tax on interest earnings," an analyst said.

He said that the low interest rates have also encouraged people to invest their money in dollars, which are expected to record a faster appreciation against the rupiah this year.

By depositing money in U.S dollars, depositors could also profit from the currency's appreciation against the rupiah, which may reach between four and five percent per annum, in addition to the rate of interest.

"Above all, depositing money in U.S. dollars will make people feel more confident and free from fears about rupiah devaluation," he said.(hen)