Liquidity needs easing to stop crisis: Economists
Liquidity needs easing to stop crisis: Economists
JAKARTA (JP): Economists have warned that the government
should further ease the tight monetary measure to prevent a
possible economic crisis.
Mari E. Pangestu and Tubagus Feridhanusetyawan, both from the
Centre for Strategic and International Studies, said yesterday
the rupiah was on the way toward stabilization, thanks to the
tight liquidity and the government's newest reform package which
had given the right signal to the market.
"But it's time the government eased liquidity and lowered
interest rates to a healthy level even though it risks a
continuing exchange rate fluctuation," Mari said yesterday.
She acknowledged that Bank Indonesia, the central bank, had
initiated a reduction in banking interest rates by cutting its
short-term SBI papers.
But it would not be enough to stimulate economic activities as
the central bank still kept rupiah liquidity tight, she said.
If interest rates remained high and tight liquidity prevailed,
the multiplier and domino effect would be large as defaults
affect companies, suppliers and then banks, she warned.
Tubagus added the government should concentrate on containing
inflation rates rather than exchange rates and let the market
decide the value of rupiah.
"Long-term, consistent and nonreactionary monetary policy
would also help reduce speculation on the currency," Tubagus
said.
The rupiah has been under speculative attacks following de
facto devaluations of Thai baht and the Philippines peso in early
July. It has depreciated about 20 percent since then.
To contain speculative attacks, Bank Indonesia widened the now
defunct intervention band from 8 percent to 12 percent. But the
rupiah continued to weaken, forcing the central bank to intervene
in the market.
After spending about US$1.5 billion, and with the rupiah
continuing to weaken, Bank Indonesia decided on Aug. 14 to float
the currency.
The floating rupiah then overshot to over 3,000 against the
U.S. dollar from 2,500 level. To help stabilize the currency,
Bank Indonesia tightened rupiah liquidity by raising its short-
term SBI rates and denying the money market securities (SBPUs).
Tubagus said current rupiah fluctuations were largely
influenced by investors' expectations and perceptions on the
currency and the country's overall economic situation.
The government's newest reform package, announced Sept. 3, had
helped calm the currency market and at some points regain
investor confidence, he said.
"The sooner the government follows up the Sept. 3 reform
package, the better. At least it will reduce current
uncertainty," Tubagus said.
He added that the government should fulfill its promises such
as easing liquidity, reducing interest rates, rescheduling or
postponing large government projects and dealing with problem-
ridden banks.
"The government should implement them all to maintain their
credibility," he said.
Mari agreed and said the market was now waiting for the
government's firm actions against problem-ridden banks.
But the government should, in the first place, make clear-cut
guidelines on bank liquidations to prevent unnecessary panic
among depositors.
Tubagus added the government needed to improve legal
certainty, including on bank liquidation.
As the monetary tools were no longer effective in covering up
problems in the real sector, Tubagus said, the government should
launch another reform package to address the problems.
Transparent, consistent and accountable real sector policy
would improve the country's efficiency and at the same time help
improve people's confidence in the rupiah.
Mari added the government's recent announcement on plans to
scrap the National Logistics Agency's (Bulog) trading monopoly on
several agriculture products, for instance, had given the right
signals to the market.
"It signals the political will on part of the ruling power to
end monopoly. The signal is more important for the market now,"
Mari said. (rid)