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)