Overheated economy in control

Overheated economy in control

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono said yesterday that concerted efforts to reduce the current account deficit and control inflation would serve to keep Indonesia's economic overheating within safe limits.

He said monetary policy priorities are controlling the current account deficit and inflation rate so as to maintain macroeconomic stability.

"In the last few months, a number of indicators have shown heartening signs," Soedradjad said during a panel discussion at the Indonesia Summit, a two-day business forum on the Indonesian economy.

He said that since the third quarter of 1995, for example, the narrowly-defined money supply (M1) showed indications of slowing down.

The narrow money supply, which grew by 16.1 percent in December of last year, declined to 14 percent in February. Meanwhile, the broad money supply, which reached its highest level of 28.04 percent in November, also slowed down to 26.79 percent in February, but is still far higher than the 17 percent indicative target stipulated in 1996/97 budget plan.

Bank credits, which reached their highest annual growth rate of 27 percent in August 1995, dropped to 23.6 percent in February of this year, also far higher than the indicative target of 16 percent.

Soedradjad said that the annualized inflation rate also declined to 8.6 percent in February, from 10 percent in the previous period. But it was still far below the target of 5 percent, despite the decline.

"Compared with the inflation rate over the last two years, developments in 1995 were certainly an improvement," he told some 600 local and foreign business executives in the business forum.

Speakers at the panel discussion included Coordinating Minister for Economy and Finance Saleh Afiff and Minister of Finance Mar'ie Muhammad.

Soedradjad acknowledged that although indicators have shown positive signs with regards to the cooling down of the economy, the growth rate of the broad money supply remains high.

The high growth in the broad money supply was attributed to the rapid expansion of bank credits and foreign capital inflows, he said.

"However, the inflows of the short-term foreign funds remain strong despite the decline in bank credits," he said.

For the current fiscal year, he added, the growth of the broad money supply was determined at 17 percent and that of credits at 16 percent.

Soedradjad added that interest rate differentials of domestic and international rates will be monitored closely to remain at sustainable levels so that disruptions from capital flows could be more easily controlled.

The government will also continue to improve regulations on offshore commercial borrowings, including a better monitoring system for borrowings by financial institutions and non-bank private companies, he noted.

Tight

Minister Mar'ie reiterated that the government would continue to maintain tight monetary policies to cool down the economy, which last year grew by 8.07 percent against 7.48 percent in 1994.

"Prudent fiscal policies are a pillar of the economy," he said, adding that curbing the rapid surge in domestic consumption and short-term offshore borrowings are priorities in the current 1996/97 fiscal year.

He said that the government would continue to speed up the payment of high-interest loans in a bid to reduce the external debt burdens.

In the current fiscal year, the government would prepay high interest foreign loans of around $625 million with the surplus from the just-completed 1995/96 budget.

The prepayment will raise the total amount of the early amortized high interest loans in the last two years to around $2.14 billion.

The previous prepayment of the loans, with interest rates of above 9 percent, were financed by proceeds from the privatization of state-owned companies PT Indosat, PT Telkom and PT Tambang Timah, which are now listed on domestic and overseas stocks exchanges.

In his speech, Coordinating Minister Saleh Afiff said that all existing policies -- both in financial and real sectors -- would be optimized in curbing inflationary pressures and the widening current account deficit.

"We can no longer rely on a single instrument to make up for slack elsewhere," the coordinating minister said during the panel discussion.

He acknowledged that the current account deficit increased sharply last year from the impact of a sudden surge in imports at a time when export growth was slowing down.

On Monday, the government revised upward the estimate of the current account deficit for 1996/97 to $8.7 billion from an earlier estimate of $6.9 billion. The current account deficit was $7 billion in the previous fiscal year.

The revision was made following a significant increase in imports in recent months.

He said that excess demand pressures, which partly resulted in the surge of the current account deficit, are not surprising for Indonesia's economy, which has experienced an average growth rate of 8 percent for the past seven years.

"But since overheating can affect confidence even before serious strains emerge in the real economy, swift action was called for," he said.

The measures taken to combat overheating involve a combination of fiscal and monetary restraints. Fiscal policy was tightened, resulting in a Rp 3 trillion-plus (US$1.34 billion) surplus in the 1995/96 state budget, which ended in March. (hen)

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