'Political infighting' behind rupiah's fall

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin blamed yesterday politicians' maneuvering for causing the rupiah's continuing plunge against the U.S. dollar.

He called on politicians to refrain from acting or commenting in ways which would only create a jittery environment and prevent the government from working to salvage the damaged economy without any political disruptions.

"The rupiah is now largely influenced by political factors," Sjahril told journalists at the unveiling of Bank Indonesia's (BI) 1997/1998 annual report.

"We call on politicians to give the economic team a chance to handle the economy so it can recover without political disturbances and demonstrations.

"This appeal comes from the bottom of my heart," Sjahril said, adding that political disturbances, including public demonstrations, would only further weaken the rupiah.

Sjahril said he was confident the country's political leaders could comprehend his plea because they were also concerned with people's hardships.

"Our economy is already fragile. Without any political stability, it would be very difficult to stabilize the exchange rate, which is key to the economic recovery."

He said the appeal was not superfluous because although BI is not involved in politics, "It's the central bank which has to clean up the dishes" of the negative impact of political infighting.

The continuing plunge in the rupiah's exchange rate has left the country's economy in its worst economic crisis in three decades. The government is forecasting inflation will soar to about 80 percent, with the economy contracting by 10 percent this year.

The rupiah sank to its lowest level of Rp 17,000 to the dollar in January, from Rp 2,450 in July before the crisis. The currency managed to stabilize at around Rp 7,000 in early May after the government struck a renewed deal with the International Monetary Fund in April and the central bank raised its key interest rates.

Strong pressure on the rupiah returned following the May 14 rioting in Jakarta and several major cities which led to Soeharto's resignation as president on May 21.

Since then the rupiah has continued to weaken, surpassing Rp 15,000 recently and was trading at around 14,700 yesterday amid continuing organized public demonstrations to undermine the leadership of the new president, B.J. Habibie.

Rumor has it that Soeharto is preparing for a comeback into the political arena.

Interest rates

Sjahril reiterated that the central bank would continue to maintain a high interest-rate policy to stabilize the rupiah and curb inflation.

"We're confident that the high interest rate policy is the right step," he said, adding that lowering the rates would only further weaken the rupiah.

"If the exchange rate doesn't strengthen, it will be very difficult for BI to lower interest rates," Sjahril said.

The central bank's one-month SBI short-term promissory note benchmark rate now stands at 58 percent per annum.

There has been mounting pressure for BI to lower the rates in order to restore the ailing banking sector and revive business activities.

Sjahril also said that although he believed the current free- floating exchange rate system could succeed in strengthening the rupiah, BI would be open to other alternatives, including reintroducing the managed float system, as suggested by former finance minister Mar'ie Muhammad.

"We'll not be so stubborn in keeping this system (free-float) without studying other alternatives," he said.

Mar'ie and Sjahril's predecessor J. Soedradjad Djiwandono opted to abandon the managed float system on August 14 after attempts to widen the rupiah trading band up to 12 percent failed to defend the currency and only resulted in the depletion of BI's foreign exchange reserves.

Mar'ie said Tuesday that the reintroduction of the managed float system could work only if the IMF provided its support, including permitting the country to use a large part of the US$43 billion bailout arranged by the IMF to rescue the economy. (rei)