Rupiah's fall has not hurt economy, says central bank

Dadan Wijaksana, Jakarta

Bank Indonesia said the recent sharp drop in the value of the rupiah against the U.S. dollar had not yet caused a significant negative impact on the local economy.

The central bank said it was optimistic the economy would grow faster at 5 percent this year on continuing strong domestic consumption.

"On the macroeconomic side, the weakening of the rupiah in May 2004 has not yet had a significantly negative impact on the domestic economy," the central bank said in a statement after its board of governors monthly meeting late on Tuesday.

The rupiah has been weakening during the past month, falling to a 26-month low at one point, and is seen as the worst- performing currency in the Asia region.

Bank Indonesia said that the average closing rate of the rupiah during May was Rp 9,028 per dollar, or 4.8 percent lower than the previous month's average.

There have been worries that the weakening of the local currency would create strong inflationary pressures, which in turn would weaken consumer purchasing power and thus affect domestic consumption and economic growth.

Domestic consumption accounts for about 75 percent of gross domestic product (GDP).

However, while admitting that inflation could slightly exceed the initial forecast of 6.5 percent, Bank Indonesia said this would have only a small impact on the overall economy.

The central bank expected second-quarter economic growth would be faster than its initial prediction of 4.3 percent to 4.8 percent.

"The prediction was based on increasing public expectations of good economic prospects, as indicated by various surveys conducted by Bank Indonesia and other agencies up to April," the central bank said.

"In the meantime, rising confidence from the business sector has had a positive impact on investment, and exports have grown, albeit at a relatively limited pace."

The state budget targets economic growth at 4.8 percent this year. It grew last year by 4.5 percent, the fastest since 2000.

Indonesia's economy will need to expand at a robust pace of at least 6 percent to be able to absorb fully some 2.5 million new workers annually, and part of the nation's open unemployment, which stands at 10 percent. (wording changed slightly here)

The statement also attributed the rupiah's slide mostly to external factors including an imminent U.S. rate hike, a slowdown in China's economy and soaring oil prices -- which then had a negative impact on the economy.

"From the domestic side there was an increase in (dollar) demand from corporations for import and debt repayment financing, apart from speculation (against the rupiah)," it said.

Bank Indonesia has introduced measures to help reduce speculative dollar purchases, such as raising the minimum reserve requirement of banks and wider use of financial instruments -- including the sale of new, six-month bills.

It has also created a seven-day "intervention rate", which allows the central bank to borrow rupiah from banks at a 7 percent interest rate.

The minimum reserve requirement will also be raised starting July 1 to between 6 percent and 8 percent from the current 5 percent, depending on the amount of a bank's deposits and savings.