Interest rate could drop below 10 percent: IMF

JAKARTA (JP): The Indonesian interest rate could fall further to a single digit level by year-end without hurting the exchange rate of the rupiah to the U.S. dollar, International Monetary Fund (IMF) Asia-Pacific director Hubert Neiss said on Friday.

"If inflation continues to fall, there's no reason for the Indonesian interest rate not to drop below the double digit level," he told reporters after meeting with Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita to finalize the government's new letter of intent (LoI) to the IMF.

The new interest rate outlook appears lower than the 12 percent forecasted earlier by Bank Indonesia for year-end.

The benchmark interest rate of Bank Indonesia's one-month promissory note (SBI) was at 70 percent last August when the country's economic crisis heightened, and at more than 35 percent at the beginning of this year.

The benchmark interest rate is now at 15.86 percent, compared to 10.87 percent in July 1997 when the economy was about to plunge into its worst crisis in three decades.

The lower interest rate environment is expected to encourage domestic banks to resume lending to the real sector to kickstart an economic recovery.

The new letter will set government economic priorities which are reviewed together with the IMF every two months.

Neiss said the letter would be sent to the IMF headquarters in Washington for approval and would be released to the public next week.

The approval of the new letter would pave the way for another disbursement of IMF bailout money for Indonesia. The Fund is organizing more than US$46 billion bailout cash to finance the country's economic reform programs.

Government officials earlier said the new letter would also include an upward revision of macroeconomic targets.

Neiss said gross domestic product (GDP) growth was now estimated between 1.5 percent to 2 percent for the fiscal year ending March 2000, compared to an earlier projection of a flat growth.

The economy contracted by 13.68 percent in 1998. But the GDP started to show signs of a turn around in the first quarter of this year. The economy grew by 1.8 percent in the second quarter.

A senior government official said earlier this week that inflation was now estimated between 8 percent to 10 percent for the fiscal year, and below 6 percent for the whole calendar year.

The government previously projected inflation for the current fiscal year at less than 10 percent, and between 10 percent to 13 percent for all of 1999.

Inflation was more than 77.63 percent in 1998. But since March this year, inflation has been falling into negative territory.

Neiss also said the Fund and government were more confident on the outlook for the rupiah.

He said the rupiah should be trading at an average rate of Rp 7,000 per U.S. dollar for the whole calendar year, an improvement to the Rp 7,500 average projected for the 1999/2000 fiscal year.

Neiss said the rupiah was hovering around Rp 7,000 during the second quarter of this year.

He predicted the strengthening of the rupiah would continue on the back of political stability and consistency with economic reform programs.

The rupiah dropped to more than Rp 17,000 to the dollar last year.

But the rupiah has steadily appreciated over the past couple of months as macroeconomic indicators continue to improve, and the country's landmark June 7 general election turned out peacefully.

Neiss also said the new letter included additional measures to speed up the recovery of assets under the Indonesian Bank Restructuring Agency (IBRA) to finance the country's bank restructuring and recapitalization program.

IBRA currently holds some Rp 600 trillion in various assets including shares in companies pledged by former bank owners to repay debts to the government and nonperforming loans (NPLs) owed by bank debtors.

Many have criticized IBRA for dragging its feet in recovering the various assets, particularly in forcing debtors to repay the NPLs. Most debtors are politically well-connected businessmen.

IBRA has aimed to raise some Rp 17 trillion in the current fiscal year to help finance the interest cost of the government bonds issue.

Finance minister Bambang Subianto said earlier this week that the government would issue bonds worth Rp 550 trillion to finance the bank restructuring and recapitalization program.

The government has so far issued more than Rp 157 trillion worth of bonds, and is expected to issue more than Rp 231 trillion worth of bonds this year. The interest cost of the bonds issue this fiscal year is estimated at Rp 34 trillion, in which IBRA will cover half, and the budget will cover the remaining.

Bambang has said the interest burden for the next fiscal year would be much higher, depending on the development in domestic interest rates.(rei)