Unrest poses serious threat to monetary stability: BI

JAKARTA (JP): Bank Indonesia senior deputy governor Anwar Nasution said on Tuesday that the ongoing sectarian clashes and social unrest in several parts of the country could become a serious threat to monetary stability.

"The worrying problem is the impact from noneconomic factors," he said, pointing to the year-old Christian-Moslem clashes in the Maluku Islands and other riots in several parts of the country, which have killed hundreds of people.

Anwar said if the tension could be eased, this year's inflation rate, for example, could still be checked at a single digit despite the government's plan to raise salaries of government employees and increase prices of regulated commodities.

He said the increase in the salaries of government employees and the prices of fuel and electricity would only contribute an additional 2 percentage points to the central bank's initial inflation target of 3 percent to 5 percent for this year.

"So it (inflation) will only be 5 percent to 7 percent. This is still okay," he told reporters on the sidelines of a working session between Bank Indonesia and the House of Representatives commission IX on the state budget and banking.

The sectarian clashes and social unrest have weakened the exchange rate of the rupiah against the U.S. dollar. The rupiah is now hovering at Rp 7,300 to the dollar, compared to about Rp 7,000 late in December.

A weakening of the local currency would push up prices as the country's production system still heavily depends on imports.

Keeping prices under control is one of the major tasks of Bank Indonesia, which has now become an independent central bank.

Anwar said that relatively low inflation was also a high priority of the government because it would help prevent the government-sponsored bank recapitalization costs from soaring.

The government has issued bonds worth billions of dollars to help finance the bank restructuring and recapitalization program.

The state budget will cover the interest rate of the bonds. Part of the bonds are issued with interest rates linked to inflation level.

"If inflation rates increase, the interest rate burden (of the bonds) will also increase," Anwar said.

The government has said it plans to raise the salaries of government employees by less than 20 percent in the upcoming April to December 2000 state budget.

The government is also planning to reduce fuel and electricity subsidies, which may end up with a 20 percent increase in fuel prices and a 35 percent hike in electricity rates.

The government will also reimpose a 30 percent import duty on rice and 25 percent on sugar in a bid to protect local farmers from cheaper imports.

Bank Indonesia deputy governor Achjar Iljas said although theoretically and empirically the above measures would push inflation upward, the impact was expected to be less significant.

"Of course there will be the so-called announcement effect. But if the media doesn't blow this up, the impact will be minor," he said.

Achjar conceded that based on preliminary calculations by the central bank, the impact of the government's new measures would only add up to 2 percentage points to Bank Indonesia's inflation target of 3 percent to 5 percent.

"But this depends on how big the salaries will be increased to and how large the subsidy cuts will be," he said.

Achjar maintained that the Rp 45 trillion deficit in the 2000 state budget would not cause inflation because the government had said the deficit would be financed by proceeds from the sale of state enterprises and banking assets of the Indonesian Bank Restructuring Agency (IBRA), and the remainder from foreign loans.

"So there will be no lending from the central bank," he said.

Asked about the direction of interest rates, Achjar said the central bank had no plans to raise its benchmark interest rate, despite the current weakening of the rupiah.

"If inflation remains under control and the rupiah remains at the current level, the interest rate can be maintained at the current level," Achjar said.

The central bank's benchmark interest rate is currently slightly higher than 11 percent. (rei)