Stifling interest rates

Stifling interest rates

Bank Indonesia has increased its interest rate for Bank
Indonesia promissory notes (SBI) to 45 percent a month. One
consequence is an increase of commercial banks' interest rates to
47.5 percent for one-month time deposits and 19 percent for one
year. The central bank's purpose for increasing its SBI interest
rate is to attract the people to deposit their money in banks,
with the expectation that the rupiah exchange rate will be
strengthened. This objective has not been attained because the
exchange rate remains relatively high, that is Rp 8,500 for one
U.S. dollar.

Apparently, the bad effect on domestic businesspeople was
hardly taken into account. They have borrowed money from banks
for their operations and now, the interest rate on loans has been
raised to about 60 percent per annum. This is a heavy burden for
them.

They are experiencing major difficulties because of the
monetary crisis. Imported raw material and spare parts have
increased by 200 percent to 400 percent. If this condition
continues for a long time, it will result in bankruptcy for many
businesses. There will be huge lay offs. The economy will
stagnate or go into recess. It will worsen the economic crisis,
which will bring destruction to the country.

If the association of banks has fixed the time-deposit
interest rate at a maximum of 47.5 percent for one-month deposits
and 19 percent for one-year deposits, businesspeople also want to
see a reasonable level of interest for their loans. In my
opinion, that level would be a maximum of 30 percent.

It is hoped that Bank Indonesia will lower its SBI interest
rate to a reasonable level.

SUHARSONO HADIKUSUMO

Jakarta