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)