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Indonesia must control current account deficit: IMF
Publication Date : 30-08-2013
The International Monetary Fund (IMF) has encouraged Indonesia to continue its focus on reining in the current account deficit and containing inflationary pressures.
IMF Advisor for Asia Pacific David Cowen said on Thursday that Indonesia’s move to let the exchange rate absorb some of the pressure was positive and this would generate “meaningful adjustment” of the current account over the near to medium term.
The rupiah has fallen through its psychological level of 10,000 Indonesia rupiah per US dollar in the past two months. The local currency reached a four-year low of 10,955 Indonesia rupiah on Wednesday, but it advanced for the first time this week to close at 10,935 Indonesia rupiah per dollar on Thursday, according to data from local banks compiled by Bloomberg, following the central bank’s move to raise its benchmark interest rate by 50 basis points to 7 per cent.
“I think the exchange rate can carry the burden. That’s where policies are going to matter and that’s where, with the right policies, there can be an orderly adjustment in our view and Indonesia can continue to maintain its reserve buffer and be prepared to weather any additional external shocks that could arise in the near term,” Cowen said in a gathering hosted by the Indonesian Employers Association (Apindo).
Cowen also described the move by Bank Indonesia (BI) to raise its benchmark rate as an important decision to help address the current account pressures as well as bolstering investor confidence. At the same time it would also curtail excessive credit expansion in the country and help banks better manage their liquidity needs.
“The policy rate is still negative in real terms, but compared to some others cutting policy rates in recent months, Indonesia is in relatively good standing, but probably has to go further,” said Cowen, who has come to Jakarta along with an IMF mission over the past weeks for intensive talks with BI and government officials.
Indonesia, Southeast Asia’s largest economy, is currently struggling with inflationary pressures following its move to cut subsidies and increase the fuel price in May. The central bank has predicted that the inflation rate could rise to above 8 per cent, higher than the 7.8 per cent it earlier estimated.
As its trade deficit widens, the country has seen its current account plunge with the second-quarter deficit reaching a record high of US$9.8 billion, representing 4.4 per cent of its gross domestic product.
Apart from quick fixes to short-term problems, the international lender also suggested Indonesia should prioritise medium-term policies that included fiscal reforms and labour market flexibility.
Pertaining to the proposed state budget, the agency said that it would be necessary for Indonesia to draw up a renewed structural reform agenda, particularly allocating sizeable investment for infrastructure development, which would be critical in dealing with some supply bottlenecks. This could help the country diversify its ex