Sjahril warns of further interest rate increase

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin said on Friday the central bank would continue raising interest rates if pressure on the rupiah persisted.

But Sjahril said he expected the government would soon reach an agreement with the International Monetary Fund to help reduce the pressure on the currency.

"The most important thing now is for the government to reach an agreement with the IMF. If this (agreement) can be reached it will be a very positive factor," he said following Friday prayers.

"But if (the agreement) cannot be reached, the rupiah will remain under strong pressure," he said, adding that if the pressure continued the central bank inevitably would raise interest rates to defend the embattled local unit.

Sjahril said the central bank also would continue to intervene in the currency market by selling its dollar reserves to help stabilize the rupiah.

Bank Indonesia raised the benchmark interest rate of its one- month SBI promissory note to 15.24 percent during the weekly market auction on Wednesday, up from 14.94 percent the previous week.

Some observers are concerned the increase in the benchmark interest rate could create new trouble for the fragile domestic banking industry and threaten the state budget.

Bankers and analysts have said a further increase in interest rates could cause banks to suffer negative spread.

The rising interest rates also could increase the burden on the already strained state budget, which must cover the interest of the government's bank recapitalization bonds. Part of the interest of these bonds is linked to the SBI rate.

The rupiah dropped to a 30-month low of Rp 11,500 against the US dollar earlier this month, the result of a combination of strong corporate dollar demand, domestic political and security uncertainty and a standoff between the government and the IMF.

But the rupiah has stabilized somewhat this week as a result of the central bank's decision to intervene in the market and increase interest rates.

The rupiah closed slightly higher on Friday at Rp 10,385 to the dollar from Rp 10,390 on Thursday. Dealers said the rupiah was helped by reports that the Indonesian Bank Restructuring Agency (IBRA) had begun to convert its dollars into rupiah.

Minister of Finance Prijadi Praptosuhardjo said on Thursday IBRA sold about $17 million last week, adding that the agency would continue to sell its dollars.

Sjahril welcomed the move by IBRA, but he also said a stable political situation was crucial for a stronger rupiah.

Narrowing differences

Separately, Coordinating Minister for the Economy Rizal Ramli said on Friday the government expected to be able to reach a new agreement with the IMF soon, as the two parties were continuing to iron out their differences.

"Our differences have been narrowing," Rizal said following a ceremony to install the new head of the State Logistics Agency, Widjanarko Puspoyo. But he declined to say when the government would reach a deal with the IMF.

The IMF pledged a total of $5 billion to help finance the country's three-year economic reform program, and has so far disbursed about $1 billion of this amount.

Late last year, the IMF delayed the disbursement of the third $400 million tranche because of what it saw as the government's wavering on key economic reforms. The IMF specifically cited the delay in the sale of the government's stakes in Bank Central Asia (BCA) and Bank Niaga, and its concern with the government- proposed amendment of the central bank law and the new fiscal decentralization policy.

The delay in the delivery of the IMF tranche has prompted other multilateral institutions, including the World Bank and the Asian Development Bank, to cut their aid to Indonesia.

Expectations of a new agreement with the IMF increased when the House of Representatives recently approved the government's plan to divest its ownership in BCA and Bank Niaga.

The government also has agreed to the IMF's demand to form a panel of international experts to review the proposed amendment of the central bank law.

Rizal said the former head of the National Development Planning Board, Boediono, and banking expert Sutan Remy Sjahdeini had been named to represent the government on the panel. And he said former central bank governors from New Zealand and Chile would be included on the panel as representatives of the IMF.

Rizal also said a small IMF technical team had arrived in Jakarta and was discussing fiscal decentralization with the Ministry of Finance. (rei)