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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