No 'shock measures': BI governor
No 'shock measures': BI governor
JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono
assured yesterday that the government would never again use
"shock measures" to curb the impact of economic overheating.
He said that the "no shock measure" policy had been clearly
stated during the early stage of the present cabinet and that "I
and the minister of finance have reached a firm commitment not to
adopt such a policy".
The central bank governor was speaking to journalists after
inaugurating members of the Indonesian Bankers' Institute, a non-
profit organization founded by Indonesian bankers.
"We have been working for three years and as you see, no such
measure has been taken," Soedradjad said when he was asked about
what measures the government might take to cool down an
overheating economy.
Former finance minister J.B. Sumarlin and Soedradjad's
predecessor Adrianus Mooy were widely criticized for their "shock
measures" in dealing with economic overheating. In 1990, the
Mooy-Sumarlin duet ordered the withdrawal of over Rp 8 trillion
(US$4 billion) in state firms' money from the banking system in a
bid to cool down the economy. They converted the huge amount of
funds into Bank Indonesia Certificates (SBIs).
The measure, popularly called "Sumarlin's shock", prompted a
spiral increase in deposit interest rates to over 25 percent per
annum from around 20 percent previously.
Soedradjad, who was appointed as the central governor in early
1993, acknowledged that there are currently signs of economic
overheating in the country.
However, he was sure that the inflationary pressure would
remain flat even though there was a sharp increase in the money
supply in the first nine months of this year.
Soedradjad said that the inflation rate, already recorded at
7.43 percent in the January-October period, was expected to reach
less than nine percent this year, as compared to 9.24 percent in
1994.
He said that last year, the monthly inflation rate in November
and December stood at 0.45 percent and 0.52 percent,
respectively.
The inflation rate in the remaining two months of this year is
expected to be around one percent.
The money supply grew by over 26.5 percent in the first nine
months of this year, far higher than the 21.5 percent increase in
the 1994-1995 fiscal year, as the result of the excessive
increase in bank credits.
Soedradjad said that the central bank would continue to use
its SBIs to curb the amount of money in circulation.
"Of course, we have to increase the interest rates on SBIs to
make them more attractive to buyers," he said. He denied that any
rise in the interest rates of SBIs would automatically push up
interest rates on time deposits offered by commercial banks.
"It is the market which will determine the levels of deposit
rates," he said.
Soedradjad said he hoped that interest rates would remain
stable at their current levels for the next few months, given the
favorable level in the inflation rates in the last 10 months.
The average interest rates for three-month deposits have
stayed between 17 percent and 18 percent in the last four months.
Chairman of the Federation of Private Domestic Banks Trenggono
Purwosuprodjo was also upbeat that interest rates will likely
remain stable in the next three months.
He said that in the short term, interest rates might stay at
their current levels in conformity with the trends overseas.
"The recent decision of the U.S. Federal Reserve not to raise
its discount rates is very positive," he said.
Trenggono said that the government's ability to check the
inflation rate at below nine percent this year could also
discourage the rise of interest rates.
Local and foreign economists are of the opinion that the
central bank will have no choice but to raise the interest rates
on SBIs to cool down the economy. (hen)