Inflationary pressure needs to be curbed

JAKARTA (JP): Minister of Finance Mar'ie Muhammad warned here yesterday of the need to take extra measures in order to curb the stronger inflationary pressures expected next year.

Speaking at a seminar on the 1995 economic outlook, the minister said that uncontrolled inflationary pressure could lead to the overheating of the country's economy, which is expected to record faster growth next year.

He said inflows of credits to high-inflation-generating sectors, such as in the property business and consumption products, should be closely watched.

Bank Indonesia (Central Bank) Governor J. Soedradjad Djiwandono asked commercial banks earlier to slow down the inflow of credits to the property sector to prevent the economy from overheating.

Banking analysts said that too rapid growth in the property sector would not only create stronger inflationary pressures but could also disturb activities in the industrial sector.

Local economists estimate that economic growth in 1995 will likely reach between seven percent and 7.2 percent. Overseas analysts are more upbeat, with the U.S.-based Merrill Lynch, for example, predicting the Indonesian economy to grow by about 7.5 percent to eight percent next year.

At yesterday's seminar held by the ruling Golongan Karya (Golkar) party, Mar'ie said that bank lending should be directed to productive activities so that next year's faster economic growth would not result in higher inflation.

He said that he was upbeat that inflation could still be kept below 10 percent this year despite the recent increase in electricity tariffs.

Account

The development of the country's current account deficit and the increase in interest rates should also be closely monitored next year, Mar'ie said, adding that a sharp increase in new investments next year would automatically increase the import of capital goods.

"The increase in imports would consequently affect the country's balance of payments," he said.

The minister pointed out that the country's current account deficit, which is estimated to reach around US$2.33 billion in the second semester of this 1994-95 fiscal year, could grow further if there is no effective control of imports.

Maintaining the value of the rupiah against foreign currencies is another important aspect of the monetary policy next year, he said.

Mar'ie acknowledged that the country's free monetary system would also be closely watched so that the negative impact of international monetary changes could be minimized.

He said the increase in the prime rate in the United States would also push up interest rates at home "but we have to limit them to a maximum of 20 percent per annum."

The minister said that the domestic interest rates should be attractive enough to curb possible capital flight.

The Federal Reserve met Tuesday to consider raising interest rates for the seventh time this year as it struggles to cool off an economy which is ending 1994 with a bang.

Last month, the Fed raised the discount rate and the Federal fund rate by 0.75 of a percentage point to 4.75 and 5.5 percent per annum respectively.

The Fed's rate increase in November has pushed up deposit rates of local banks by one to two percentage points to between 13 percent and 15 percent.

An executive of Bank Tiara said here yesterday that another increase in U.S. interest rates would cause a rise in the local deposit rates also by between one and two percentage points.(hen)