Uncertainty could affect budget: BI

JAKARTA (JP): Bank Indonesia Governor Sjahril Sabirin warned on Thursday that the basic macroeconomic assumptions used in the revised 2001 state budget would not be realistic if political uncertainty in the country continued throughout the rest of the year.

Sjahril said that the proposed new budget assumptions were considered "realistic," only on the assumption that political conditions improved significantly in the second half of this year.

"If the (political) situation does not improve significantly, I'm not sure whether the assumptions can be met," he told the House of Representatives state budget task force during a meeting.

The government has proposed to the House a revision of the January-December 2001 state budget, following the recent sharp plunge in the exchange rate of the rupiah against the U.S. dollar, and rising domestic interest rate.

Under the proposed revision, the average rupiah exchange rate is set at Rp 9,600 per U.S. dollar (compared with an earlier assumption of Rp 7,800 per dollar), inflation rate 9.3 percent (7.2 percent), and interest rate of Bank Indonesia 3-month SBI promissory notes at 15 percent (11.5 percent).

The drop in the value of the rupiah has been partly due to ongoing political uncertainty, as embattled President Abdurrahman Wahid has been under strong pressure from the House to step down and hand over power to the popular Vice President Megawati Soekarnoputri.

The country's top legislature, the People's Consultative Assembly, will hold a special session in early August that could result in the impeachment of the President.

Bank Indonesia deputy governor Achjar Iljas said that in order for the exchange rate assumption of 9,600 per dollar to be realized, the average exchange rate over the next seven months would need to be at around Rp 9,300 per dollar.

"The exchange rate of the rupiah has been affected by not only economic, but also non-economic factors, particularly politics and security. So if these factors do not improve significantly, it's difficult to expect an average exchange rate of Rp 9,600 per dollar," Achjar said.

The average exchange rate of the rupiah during the first five months was around Rp 10,342 per dollar. The rupiah closed at Rp 11,160 per dollar late on Thursday, slightly higher than its rate of Rp 11,210 on Wednesday.

The exchange rate of the rupiah is also closely linked to the inflation rate, as the country's economy is highly dependent on imported raw materials. If the rupiah drops, inflation will increase (due to higher import costs), thus pushing interest rate further upward.

Meanwhile, Bank Indonesia deputy governor Miranda Goeltom said that amid the current uncertainty, the central bank would maintain its tight monetary policy.

However, Miranda added that Bank Indonesia would loosen its monetary policy if the political situation improved in the second half of this year.

She said that the interest rate on 1-month SBI notes could increase to almost 17 percent by August, given the current uncertainty.

The benchmark interest rate is currently hovering at 16.38 percent.

But Miranda added that if the political situation improved, the benchmark interest rate could fall to around 15 percent, allowing the interest rate on 3-month SBI notes to go down to 14 percent - 16 percent, in line with the government's budget target.

When asked by legislators to define what Bank Indonesia meant by "improvements in the political situation", Sjahril said, "It's difficult to say exactly, because it's a relative thing. What's important is a significant improvement that could increase market confidence in the economy."

Some legislators had said earlier that the resignation of Abdurrahman could improve the political situation.

Elsewhere, Sjahril said that the interest rate assumption of 15 percent was already realistic.

He said that if the interest rate assumption were lowered, as demanded by some legislators, the financial market would deem it non-realistic.

Miranda warned that if the budget assumptions were not realistic, the rupiah could immediately tumble, as when the government proposed the 1998/99 state budget with grossly unrealistic assumptions. The rupiah then immediately tumbled to Rp 7,000 per dollar from Rp 5,000.(rei)