T he very high interest rates, highest in the region, are a reflection of IMF supported policies to prevent a further falling of the rupiah and as a brake against inflation. There is mounting skepticism against this policy because one does not see the proclaimed results. Under such circumstances, banks are not lending to companies, because they cannot afford the additional corporate risk. As long as the central bank maintains the prudential requirements, even putting the screw harder on, the banking sector remains dysfunctional. Banks try to survive by investing their liquidity in the interbank market or buying central bank's paper at higher rates than average deposit rates.
T here is, however, an interesting international development.
The World Bank is appealing to Asian countries in crisis to spend their way out of it. This is diametrically against the IMF wisdom of economic contraction as a major means of adjustment. But nevertheless, the very high interest rates are choking the economy and preventing recovery of production, even for exports. Banks will not give working capital for exporting companies to import raw materials for the same general reasons. The foreign banks are also not helpful because of harsh country limits.