EXPECTING A STRATEGIC AGENDA FROM THE NEW BANK INDONESIA'S GOVERNOR

Through direct voting, Commission XI of the House Representatives endorsed Agus Martowardojo as the new Bank Indonesia’s Governor to replace Darmin Nasution whou would end its office in May. Plenary meeting of the House of Representatives agreed on Commission XI’s decision.

               

There were pros and cons regarding the newly elected Agus Martowardojo as Bank Indonesia Governor. He would be inaugurated as the new Bank Indonesia’s Governor on May 23, 2013.

               

As holder of national monetary authority, the scope of his duties would be different from his duties as holder of fiscal authority. As a finance minister, he implemented fiscal policy, while in the Central bank, Agus will be focusing on implementation of national payment system and monetary management.

               

Now, Agus would feel how effect of financial policy would give interference to the monetary policy. On the contrary, Agus had felt the monetary effect on economic stability during his office as finance minister. Fiscal and monetary policies are closely related one to the other.

               

In the midst of sluggishness of the global financial market, it was a heavy task for Agus. There was no certainty yet about when the economic crisis in Europe zone would end. Financial market players expected the new central bank’s governor to maintain stability of Rupiah exchange rate.

               

Rupiah being under pressure would stimulate exit of foreign investor’s fund invested in stocks and bonds. Foreign investors would choose to withdraw their investment fund to prevent losses.

               

Three main priorities expected by financial operators which were also experienced by the former Bank Indonesia’s Governor are: maintaining macro economic stability by controlling inflation, stimulating economic growth, and maintaining Rupiah exchange rate. Agus was also expected to issue a monetary policy which works in favor of micro, small and medium enterprises (UMKM), and the important thing is prioritizing national interest.

               

Agus would at least carry out come strategic agenda. Firstly, to perform distribution of task between Bank Indonesia and Financial Service Authority (OJK). OJK’s task is to maintain and supervise financial and banking system micro prudentially, and Bank Indonesia’s task is to supervise and maintain stability of financial system macro prudentially.    

               

Theoretically it was easy, but in practice it would be difficult as there was a grey area between financial systems and banking stability micro prudentially as well as macro prudentially.

               

The second agenda is to maintain inflation rate at a low level, at least at 4.5% +/- 1% as set by Bank Indonesia. Annual inflation rate was almost 5.5% due to March inflation which reached a quite high level or 0.67%. high inflation rate recently was due to fluctuation of prices of foodstuff (beef, garlic, and shallots).

               

The price fluctuation was chiefly due to speculators who played in distribution channel. If Bank Indonesia wished to control inflation, it must cooperate with government and many parties. In the regional scope, a price control and monitoring team had been established, and its members consist of institutions. Inflation Control Team at Central Government Level (TPIP) and at Regional Government Level (TPID) where Bank Indonesia is actively involved must play an active role in monitoring and controlling price fluctuation.

               

Another cause of fluctuation of food prices was speculation due to the inclusion food commodities in the futures market. This is in accordance with the futures market which is fluctuative and speculative. In this case, TPIP and TPID should consider not including food in the commodity futures market as it may cause sharp price fluctuation.

               

Another cause of fluctuation of food prices was speculation due to the inclusion food commodities in the futures market. This is accordance with the futures market which is fluctuative and speculative. In this case, TPIP and TPID should consider not including food in the commodity futures market as it may cause sharp price fluctuation.

               

The third agenda is to maintain stability of Rupiah exchange rate, especially against the US Dollar. What was happening so far is that Rupiah exchange rate has been quite deeply depreciated against the US Dollar. If fact, there were two sides if Rupiah was depreciated against US Dollar. Firstly, the quantity of circulating Rupiah is possibly too many. Secondly, demand for US Dollar was too high or US Dollar stock was decreasing.

               

So far, Bank Indonesia’s policy for controlling Rupiah exchange rate against the US Dollar was based on the belief that it was caused by excessive quantities of Rupiah circulations. So, in facing Rupiah depreciation against the US Dollar, Bank Indonesia always choose to raise interest, i.e. BI rate. As a result, credit rate also increases so that the real sector is the one who mostly suffered from the consequences.

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In the future, Bank Indonesia was expected to smartly control the Rupiah exchange rate through policy mix which was frequently covered by Bank Indonesia’s high officials. Availability of US Dollar in Bank Indonesia should be saved to prevent lessening of foreign exchange reserve. Bank Indonesia could also see the phenomena of Rupiah depreciation against the US Dollar from the US Dollar perspective. From this perspective, demand for US Dollar was high, in addition to import demand and payment of overseas debts and for speculation. There has to be a policy for detecting US Dollar buying for speculation purpose.

               

There is requirement to include the aim of US Dollar buying in a certain nominal amount. Compliance to this rule must be observed by Bank Indonesia. For those who violate the rule, Bank Indonesia has to impose firm sanctions.

               

The fourth agenda is to increase banking services, including customer protection, particularly in remote and under banked areas. A world bank’s survey (2010) found that more than half of Indonesian population was unserved by the banking sector. Financial inclusion program must be implemented consistently in welcoming the effective application of ASEAN Economic Community 2015.

               

Customer protection is equally important, particularly when there were recent cases of factious investment. Before banking supervision is transferred to IJK next year, Bank Indonesia should educate the public on safe investment products.

               

The fifth agenda is to improve banking services for micro, small and medium enterprises (UMKM). In this case, Bank Indonesia has issued a regulation requiring banks to distribute credit at least 20% to UMKM segment, and this target must be achieved by 2018. The stages are 5% in 2014, 10% in 2016, 15% in 2017, and 20% in 2018. (E)

Business News - April 10,2013