Interest rates
Interest rates
In recent months, Bank Indonesia has been offering rates of
between 50 percent and 70 percent for depositing rupiah with it,
in an attempt to underpin the value of the local currency. But
short-term foreign currency funds have still fled, and much of
what remains is locked into fixed assets for the long term. The
foreign exchange market is currently quiet, with state banks
acting as net sellers of dollars pushing the rupiah gradually
firmer. In trade terms, the net sale of dollars for rupiah should
only get stronger as the value of exports further outstrips
imports.
The Indonesian government is set upon a target for the rupiah
of Rp 10,600 per U.S. dollar by March 1999.
Given that the currency is seriously undervalued, whether it
achieves this target is only weakly linked to the interest rate.
It has much more to do with investor confidence, which given
recent events, now weighs heavily with the country's political
and social risks.
Meanwhile, such high risk-free interest rates have all but
stopped banks carrying one of their normal functions, extending
commercial credit to companies and individuals, thus killing off
the real economy. The resulting damage wrecks corporate balance
sheets and rapidly destroys any individual's leveraged wealth.
In other East Asian countries -- Malaysia, South Korea and
Thailand -- prime lending rates have long since come down, now to
between 10 percent and 15 percent, without this adversely
affecting their exchange rates.
Perversely, the main beneficiaries of the high interest rates
are the banks. And the more financially stable the bank, the
lower the rate it pays its deposits. Indeed, most bank
customers's deposits receive barely half the BI rates, even when
held for the period offering the best rates.
Such largess by Bank Indonesia to local banks is clearly
wasteful. It is evident that BI could today drop its Sertifikat
(certificate) Bank Indonesia deposit rates by half without
serious impact if it were also to signal a limit in the spread
offered by the banks to depositors for their funds of no more
than 5 percent below BI's rate. After all, this is risk free for
the banks. So why should they be capturing half the interest
payments on offer simply for banking other people's money with
BI?
Should banks refuse to return to their customers a fairer
share of the gains they have made, I believe there is a good case
for imposing a windfall tax on banks for exploiting their
customers' search for a local "safe haven" during the current
weak banking situation.
It cannot be right that some banks have more than doubled
their individual customer base over the past year, reduced the
average wealth of these customers through passing all and more of
their risks onto them via imposing wider foreign exchange spreads
and negative real (inflation adjusted) interest rates and
increasing charges, while returning four-to-five fold increases
in profits to their shareholders.
Whether bank depositor or taxpayer, one thing is sure. While
the government wastes money in this way today, its largess is
being debited to your tax bill to be repaid, with interest,
tomorrow.
SEAMUS MCELROY
Ciledug, West Java