Investment climate key to recovery: BI

Investment climate key to recovery: BI

MELBOURNE (Reuters):Indonesia's central bank acting governor on Monday declared that improvement in the country's investment climate was key to a sustainable recovery for its economy.

"We are very serious about improving the investment climate. For sustainable growth we need this," Anwar Nasution told Reuters in an interview at the World Economic Forum.

Nasution also said Indonesia's International Monetary Fund (IMF) program had evolved to the point where the government was taking the initiative, ensuring a fairer distribution of the cost of reform and an increasing political commitment to change.

"In contrast with the past, it's become a more homegrown program. And because it's homegrown, there will be more determination to implement it," he said.

Jakarta last week signed a new letter of intent to the IMF, which contained few major changes and paved the way for a new $400 million loan from the fund later this month.

After contracting by some 14 percent at the height of the crisis in 1998, the Indonesian economy has rapidly recovered, to the point where the government expects growth next year of up to five percent.

But economists say the improvement is based largely on consumption and could quickly stall if foreign and domestic investors do not return.

Nasution blamed political uncertainty and speculation for the recent decline in the rupiah, but expressed confidence the currency would stabilize and appreciate gradually against the U.S. dollar to about Rp 7,500 by the end of the year from around Rp 8,400 now.

He said the nation had had to deal with the twin crises arising from the transition to democracy and to less centralized government, but longer term these changes would yield positive results.

"Once we solve this, we will have much stronger fundamentals," he said.

"By giving authority to eastern parts of Indonesia, they can more easily exploit the market potential in other regions like Australia."

Nasution also dismissed market speculation that the government would introduce new controls to curb foreign exchange speculation.

"We will stick to the IMF letter of intent for a floating exchange rate system," he said, adding that the government did not have the capacity to change the rules in any case, given the weak banking system.

However, he expressed confidence that the restructuring of the banking sector, a critical element of the IMF-led program, would pick up pace.

"I'm very optimistic. Scandals like Bank Bali are already past history so now we can move forward at a much quicker pace," he said, referring to the case in which Bank Bali has been accused of paying a whopping recovery fee of 546 billion rupiah to a company with close links to the then ruling Golkar Party.

Nasution said while domestic interest rates were gradually coming down, progress had been hampered by the lack of a secondary market for government bonds.

"Gradually we can develop the secondary market and then we can reduce the pressure on interest rates in the interbank money market," he said.