Reserve requirement raised to slow down credit growth
Reserve requirement raised to slow down credit growth
JAKARTA (JP): Bank Indonesia raised yesterday the bank reserve requirement to 3 percent from the present 2 percent in a fresh move to slow down the excessive growth in credits.
Paul Sutopo, the central bank's managing director for the money market and foreign exchange, announced that the rise in the reserve requirement, the first since 1988, will become effective in February next year.
He said that the move requires commercial banks to keep at least 3 percent of their funds, including foreign exchange, at the central bank.
The rise in the reserve requirement will automatically reduce the liquidity of commercial banks and at the same time push up their overhead costs. This may then put more pressure on interest rates.
Paul, however, said the impact that the increased reserve requirement will have on the liquidity of banks will be minimal, given the healthy condition of the banks' present reserves.
"The one-percentage point increase is ideal and I think it will cause no problem to banks' liquidity," he said, adding that the average level of banks' reserves is above 2 percent.
Under the new legal reserve requirement, each bank should deposit its reserve in its checking account at the central bank. Unlike at present, the new requirement will not include each banks' ready cash (vault) or funds placed in Bank Indonesia Certificates short-term promissory notes.
Boediono, the central bank managing director for macroeconomic and statistic affairs, said that the rise in the reserve requirement indicates a need to check the economy and keep it on the right track for next year.
Overheating
"However, it does not mean that we have a problem. The monetary system remains under control," he said when asked if the rise in the reserve requirement is mainly directed at alleviating the economic overheating.
President Soeharto was quoted by Minister/State Secretary Moerdiono as saying in Bangkok yesterday that Indonesia's economy is overheating and that the government will take measures to relieve it.
"The government has taken measures and will take more measures to cool down the economy," Moerdiono told Indonesian reporters covering the fifth summit of the Association of Southeast Asian Nations in the Thai capital.
Boediono said that the term overheating should be taken from the correct perspective because the wrong definition could mean there is something wrong with the economy.
"The economic growth has been faster than the target. Imports grew higher than expected. In this case, it could be called overheating," he said.
The Singapore-based research unit of JP Morgan said recently that a tighter policy is needed to offset the stimulative impact of the huge buildup of foreign and domestic investment approvals.
According to JP Morgan, rising interest rates and reserve requirement are both essential to curb the growth in the money supply.
Bank Indonesia Governor J. Soedradjad Djiwandono recently warned of an overheating economy, following the reported sharp increase in the money supply and in the current account deficit.
The broad-term money supply increased by 26.5 percent in September, far higher than the 21 percent last year, Soedradjad said.
The higher than expected increase in imports also caused a sharp increase in the current account deficit.
The Econit advisory group predicts that the current account deficit will increase to US$6.4 billion this year from $3.1 billion in 1994.
Muchlis Rasjid, the central bank's managing director for general credits, said yesterday that the growth of credit has been too high in the last few months.
"The credit growth in November reached 25 percent. It should be reduced so that it will not be too high," he said, adding that the indicative increase in the credit growth in the current 1995/1996 fiscal year is only 19.5 percent.
Local analysts said that raising the interest rate alone would no longer be effective in reducing the money supply because the higher interest rates could trigger the inflow of foreign short- term funds. An excessive flow of foreign funds, according to the analysts, would not only put pressure on the money supply but also make the central bank's tasks more difficult in keeping the rupiah competitive. In addition, the high volume of foreign short-term funds would also increase Indonesia's vulnerability to volatile financial markets.
Paul, however, said that the rise in the bank reserves will not be directed to mainly cushion money speculation.
Besides having a sufficient amount of foreign reserves, Bank Indonesia also has a joint arrangement with other central banks in Asia to cushion the volatile short-term money market.
Bank Indonesia, central banks and monetary authorities of Malaysia, Singapore, Thailand, Hong Kong and Australia agreed in September to cooperate in dealing with money speculations.
Paul said yesterday that such cooperation will be further expanded to other Asian countries so that regional banks will be able to help each other in times of crisis. (hen/mds/rid)