Market distortions, offshore borrowing may boost inflation

Market distortions, offshore borrowing may boost inflation

JAKARTA (JP): Experts warned that market distortions and uncontrolled inflows of private offshore borrowing could send the country's inflation rate higher this year.

Laksamana Sukardi, chairman of the Reform Consulting Institute, forecasted over the weekend that private foreign borrowing will increase again this year as the result of the government's measures in tightening local bank lending.

In its drive to curb inflation, the government targets that the credits extended by the country's commercial banks will grow by only 16 percent this year, down from last year's target of 19 percent.

Laksamana noted that large private companies no more use banks and non-bank financial institutions to seek funds abroad. Instead they go straight to offshore capital centers.

Unlike banks and financial institutions, the companies are out of the central bank's touch. They have direct market access and are free to secure offshore borrowing as much as they want, Laksamana said.

"Besides, they are often larger and more bona fide than banks and finance institutions," Laksamana told The Jakarta Post over the weekend.

Concurring with Laksamana, Sri Edi Swasono, an adviser to the chairman of the National Development Planning Board, noted that such inflows of offshore borrowing will give additional inflationary pressures.

He predicted that the inflation rate will likely increase by one point to over 9 percent this year from the 8.64 percent recorded last year.

In a press briefing on the 1996/1997 budget plan last week, Bank Indonesia Governor J. Soedradjad Djiwandono revealed that private offshore loans signed from January to October 1995 reached US$6.04 billion, up sharply from $2.3 billion signed during the same period of 1994.

"However, that amount of money is still contained in signed agreements. We do not expect it all to be disbursed," Soedradjad said.

Instruments

He noted that the central bank has tried hard to curb private offshore loans through a number of instruments, including prudential regulations for banks and non-bank financial institutions.

"We do not ban anyone from seeking offshore loans. But, we just want, if you borrow, please be careful and understand the risks.

"The government also raises borrowing, but we take only concessional loans. I understand that the private sector cannot get such concessional loans, but at least they can reduce the risks.

"So, whenever offered an offshore loan, don't just grab it," Soedradjad suggested.

In the same briefing, Mar'ie explained that the 1996/1997 budget plan, proposed by President Soeharto to the House of Representatives last week, will not significantly contribute to inflation as it is contractive in nature.

Although the budget plan increases by 16 percent in spending to Rp 90.6 trillion (US$39.4 billion), most of the spending, or some 60 percent, will be financed by tax revenues. Therefore, there will be no significant increase of money in circulation.

The government targets that the money supply, both in narrow and broad terms, will grow by 17 percent this year, as compared to 20 percent last year.

Laksamana agreed with Mar'ie's view that the next fiscal year's budget will not give significant inflationary pressures. However, he warned that the private sector, which increasingly controls the country's economy, can raise the inflation rate even higher.

Much more, the government still tolerates market distortions such as monopolies, oligopolies and cartel-like practices by the private sector, he said.

"We can learn from last year's experience. The government's decision to raise cement prices, for example, raises prices of other products. That's a de facto power. The monetary authority has exerted all efforts to curb inflation, but there are cartel holders. So what?" Laksamana said.

In support of Laksamana, legislator Tadjudin Noer Said of the Golkar faction, blamed the government for its failure to give assurances to the public on the movement of the inflationary factors it controls, especially the government-set prices of certain products.

"Any time we deliberate the budget plan, we never know whether there will be increases in government-controlled prices which have direct influence on inflation. Like what happens now, we never know if fuel prices will be raised or not," Tadjudin said.

The chief of the Central Bureau of Statistics, Sugito Suwito, was quoted Saturday by Kompas daily as saying that government levies -- both legal and illegal -- on industrial companies have also raised inflation rates because the companies pass the costs onto buyers by increasing prices.

Long chains of trade caused by trade regulations have also raised prices, he said. (rid)