Bank Indonesia told not to raise rate further

The Jakarta Post ,  Jakarta   |  Thu, 03/27/2008 1:02 AM

American economist Steve H. Hanke on Wednesday warned Bank Indonesia (BI) not to further cut its benchmark interest rate as pressure from inflation was increasing.

"If BI wants to meet the new inflation target, it is impossible for them to lower the rate," Hanke told a press conference after giving a lecture at Pelita Harapan University in Tangerang, West Java.

Hanke was an advisor to Indonesia during the Asian economic crisis that hit the country in 1998, providing policy input for then president Suharto.

He said although the 0.65 percent monthly inflation last month was lower than the 1.77 percent rise in January, the country's year-on-year inflation as of February was already 7.4 percent, making it increasingly difficult for the government to meet its 5 percent (plus or minus one) inflation growth goal by the end of the year.

"It is completely unrealistic to further decrease the (current) 8 percent interest rate," Hanke said.

BI gradually lowered its rate from 9.5 percent in January last year to 8 percent last December.

Instead, Hanke urged BI to focus on the rupiah, which was still under pressure despite the weakening U.S. dollar in the global market.

Rather than accumulating foreign reserves, he said, Indonesia needed to focus on strengthening the national currency by buying it in the market.

A stronger rupiah would reduce the cost of importing goods, which could in turn lower the pressure from imported inflation.

In order to further improve the macroeconomy, the government needs to attract more investors by reforming its labor regulations, he said.

"Once the labor regulations are reformed, foreign investors will be pouring into the country," he said.

The rigid labor contract imposed by China earlier this year was forcing hundreds of Korean and Taiwanese enterprises to shift their businesses to other countries, which Hanke said should benefit Indonesia.

"Indonesia could take advantage of the situation. This labor reform is one way of doing that," he said.

Labor reform is currently being pushed by the Indonesian Employers Association (Apindo), which is advocating bipartite negotiations on five laws related to labor issues, including the 1992 law on social security and the 2000 law on the freedom of association.

Increasing attractiveness to foreign investors is as key an area as accurate budget assumption," Hanke said.

Hanke further said the country's inability to make accurate budget assumptions was one of the fundamental problems in its financial management.

"Indonesia's state budget is inefficient and not very well thought of," he said, adding that the allocated spending on fuel and electricity subsidies should have been used for funding infrastructure developments.

With global oil prices likely to hover around US$100 per barrel, the House of Representatives estimates the government will need to allocate Rp 130 trillion (about $14.22 billion) on fuel subsidies, nearly three times its initial prediction for this year.

Hanke also said local administrations were lacking the ability to spend their budget wisely even though their share in the state budget had increased. (lva)

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