Jakarta – Indonesia's central bank said Thursday it can fully implement a new monetary policy only once economic stability in the country is restored.

The appropriate timing for such a policy change has not been determined, Bank Indonesia senior deputy governor Anwar Nasution was quoted as saying by AFX-Asia, an AFP financial affiliate.

Speaking at an IMF conference here, he said Indonesia faces major challenges in monetary policy, including the continued weakness in the banking system, slow financial restructuring, the high cost of bank recapitalisation, slow corporate debt restructuring and slow economic recovery.

Nasution said Indonesia is currently considering a system that would force the central bank to use an inflation target to determine monetary policy, as well as reduce the costs of disinflation.

But major obstacles exist in implementing this form of policy in Indonesia, he said. "One constraint is our large public debt, which grew from just 23 percent of GDP in 1997 to more than 90 percent of GDP at present."

The high debt burden and large budget deficit can make it difficult for the central bank to meet its inflation target, since it would put a great strain on public finances, he said.

Given existing domestic debt levels, a one percentage point increase in the three-month interest rate raises the interest cost on domestic debt in the annual government budget by more than three trillion rupiah (315.7 million dollars), he added.

"If a large increase in interest rates should prove necessary to prevent an upsurge of inflation, the sustainability of the current level of public debt could be called into question," Nasution said.

Another problem was the volatility of the rupiah, he said. Nasution was speaking as the rupiah again broke through the 9,500 mark to the dollar, trading at 9,520-9,540 at midday. Indonesia's central bank has not so far intervened to prop up the ailing rupiah which sank to a 21-month low against the dollar this week,

"Given the strong possibility that exchange rate shocks will continue in the future, the credibility of an inflation targeting regime established under current circumstances is doubtful. It might be better to wait until the chances of success are higher before making a firm commitment to an inflation target as the overriding objective of monetary policy," he said.