Sumitro blasts zig-zag interest rate theory

Sumitro blasts zig-zag interest rate theory

JAKARTA (JP): Sumitro Djojohadikusumo, Indonesia's most senior
economist, supports the view of most analysts that State Minister
for Research and Technology B.J. Habibie's zig-zag theory on
interest rate reduction is entirely unfeasible.

"What is this zig-zag all about. You want to make this
country bankrupt?," he asked rhetorically yesterday.

He was referring to Habibie's suggestion that interest rates
be halved from their current levels of between 18 percent and 20
percent.

Speaking to journalists here at a conference organized by the
International Monetary Fund (IMF) and Bank Indonesia, Sumitro
said it was now virtually impossible to cut interest rates
significantly because inflationary pressures were so strong.

Habibie said Indonesia's interest rates, among the highest in
the world, should be reduced to as low as 4 percent per annum in
the next five years under a "zig-zag" mechanism.

Habibie said the monetary authority should initially halve
deposit rates to 8 percent from their current levels of around 16
percent.

Habibie, dubbed a "super minister" because of his close
relationship with President Soeharto and his strong influence in
government, believes high interest rates are a major cause of the
country's high inflation.

Interest rates, according to Habibie, should be reduced to cut
inflation.

Habibie's theory has been rejected by almost all local
economists who say his theory is unworkable given the state of
the national economy, which is suffering from high-capital costs.

Bank Indonesia (central bank) Governor J. Soedradjad
Djiwandono has lambasted Habibie's suggestion as totally
unrealistic.

"The problem of high interest rates cannot be resolved simply
by the uttering of a word because there are so many variables
involved," Soedrajad said Wednesday.

Sumitro, a former finance minister and architect of the New
Order's economic development program, said inflation was not
caused by high interest rates but by poor distribution of goods
and rampant market distortions.

He said the impact of interest rates on inflation was very
small. "It is certainly much less than the estimated 30 percent
losses in government development spending," he said in reference
to public funds wasted by malfeasance and inefficiency.

Sumitro, one of the most outspoken economists in the country,
estimated earlier that the government was losing around 30
percent of its budget because of inefficiency and corruption.

The government has strongly denied his assertion.

Sumitro said it was imperative that the government improve its
overall economic efficiency and eliminate monopolistic practices
and corruption.

He said this approach would reduce Indonesian interest rates
because efficiency is the key to reducing costs.

"The theory on inflation is actually taught in the first year
of economics," he said. "If you want to say something, you should
first study the subject," he added, apparently regarding
Habibie's theory.

According to Bank Indonesia's latest data, the average
interest rate on three-month deposits is 17.35 percent, while
primary lending rates for working capital and investments are
19.35 percent and 16.39 percent respectively.

Local economists say the estimated one percentage point drop
in the inflation rate to 7 percent this year would, at most,
allow a one percentage point cut in interest rates. (hen)