Monetary tools may not prevent overheating
Monetary tools may not prevent overheating
JAKARTA (JP): Existing monetary instruments are no longer effective in dealing with economic overheating because of the interdependence between the country's economy and world financial centers.
The head of the Economic Department at the Center for Strategic and International Studies (CSIS), Mari Pangestu, said yesterday the government should find new ways to solve the problem.
She suggested the use of fiscal measures, such as cutting the government's spending or increasing tax collection.
Speaking to newsmen after addressing the Asia-Pacific Forex Assembly, Mari said that raising the interest rates on Bank Indonesia Certificates (SBIs) would encourage foreign fund managers to shift their portfolio investments into Indonesia for higher gains.
"Raising the SBI rates is a dilemma. It helps curb the money supply but at the same time incites inflow of foreign funds," she said.
SBI, a short-term promissory note, is the central bank's main instrument for reducing the volume of money in circulation.
Senior economist Mohammad Sadli told the meeting that Indonesia, as one of the world's important emerging markets, has been the darling of foreign fund managers for years.
He said that being the target of foreign fund managers, the country is often posed problems caused by the volatility of their portfolio investments.
Sadli, a former cabinet minister, was one of speakers at the forex meeting, as were Bank Indonesia Governor J. Soedradjad Djiwandono and Toyoo Gyohten, chairman of the Bank of Tokyo.
The meeting was officially opened by Vice President Try Sutrisno.
New instruments
Like Mari, Sadli suggested that the government formulate a new blend of instruments for managing the country's monetary system.
"In the situation where the current account deficit is on the increase, it is difficult to use interest rates in dealing with economic overheating," he said.
Speaking about the negative impact of the volatile foreign funds, Mari told journalists that the use of new instruments could not be avoided.
The domino effect of the Mexican financial crisis early last year is still there even though the economic fundamentals of the two countries are quite different, she said.
"The rush of foreign funds could take place any time," she said. "It could either result from the psychological impact of a financial crisis in other emerging markets or an "interruption" in the country's economy."
She said she expected the effect of possible increased inflow of foreign portfolio funds to be rather minimal because the volume of those short-term funds remains relatively small compared to those in Mexico or other emerging markets.
"I think, the central bank will face no difficulty in solving such a problem," Mari said, adding that the central bank's policy on widening of the spread of the rupiah's buying and selling rates, in addition to its significant foreign reserves would be adequate enough to cushion volatile foreign portfolio funds.
Mari said a much more serious problem would emerge if domestic investors followed the rush.
Foreign reserves held by Bank Indonesia reached around US$14.5 billion as of October, an amount which is sufficient to finance imports for five months.
Mari said that the country's widening current account deficit, which has become a cause of concern among foreign investors, is within the safe level, as long as the deficit resulted from an increase in imports of productive goods.
The Econit advisory group estimates the current account deficit will more than double to $6.4 billion this year from the $3.1 billion estimated for 1994. (hen)