Interest rates will remain high this year, say analysts
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)