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