Sjahril warns of further interest rate increase

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)