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)