Interest rates will remain high this year, say analysts
JAKARTA (JP): Interest rates will remain high this year unless the government limits the expansion of its out of budget expenditure and improves the efficiency of commercial banks, analysts said yesterday.
At a seminar on the 1997/1998 state budget, Anwar Nasution predicted that non-budgetary spending would increase next fiscal year.
"There are many government programs that will be financed by non-budgetary spending," he told the seminar organized by the University of Indonesia. "This spending will include funds to finance poverty alleviation and reforestation programs."
He said this expansion would cause more inflationary pressure which would automatically lead to higher interest rates.
Anwar said the unhealthy condition of commercial banks meant that the central bank's monetary policy was no longer effective.
He said that monetary expansion or a fall in international interest rates should reduce interest rates. But in Indonesia, these conditions would not have an immediate impact on interest rates because most local banks were inefficient, he said.
Indonesia's lending rates now average 20 percent a year, compared to Singapore's 7 percent, the Philippines' 12 percent, Thailand's 13 percent and Malaysia's 8 percent.
Anwar said the government had not tried seriously to improve commercial banks, which dominate Indonesia's financial system.
Consequently, he said, its tighter prudential policy and the severer penalties applied by the central bank, Bank Indonesia, were ineffective.
Dependent
He said the central bank was entirely dependent on its Bank Indonesia Certificates, short-term promissory notes, for its open market operations.
The sale of commercial paper in the money market could strengthen open market operations but the lack of regulations made the papers unpopular, he said.
"Bank Indonesia must make higher interest payments if it sells the certificates at higher rates," he said.
On the country's monetary outlook for the next fiscal year, he said the central bank was unlikely to change its policy.
He said that two monetary policies, announced last year, would soon be effective. They are the legal lending limit and the increase of banks' reserve requirement from 3 percent to 5 percent.
The two policies will result in higher interest rates because the policies will limit the expansion of bank credit.
Moh. Arsjad Anwar of University of Indonesia shared Anwar's view at the seminar, saying that problem loans were also keeping interest rates high.
He said the increase in government spending, particularly development spending, would raise inflation pressure in 1997/1998 and keep interest rates at their current level.
According to a study by the university's Economic and Society Research Institution, presented by Sri Mulyani at the seminar, three factors are expected to influence interest rates this year.
Last year's lower inflation rate of 6.6 percent will tend to lower interest rates.
The increase in the reserve requirement in April could push up interest rates.
And interest rates in the U.S., which are expected to rise this year, are expected to push up domestic interest rates.
She said inflation this year would be about 7 percent because of monetary contraction and rising production and distribution costs.
She said the central bank should focus its attention on its basic job of controlling the money supply to check inflation, while pursuing its economic growth target.
According to the study, the Indonesian economy will grow 7.52 percent this year, down slightly from the 7.76 percent growth rate last year.
"But the growth is still higher than the government's target of 7.1 percent," she said, adding that investment growth this year would decrease to 8.1 percent from 10.01 percent last year. (bnt)