MONETARY AND BANKING POLICIES
IN INDONESIA:
Issues and Outlook

Oleh : J. Soedradjad Djiwandono
Gurubesar tetap Ilmu Ekonomi, Universitas Indonesia


* A presentation for GLOBAL ECONOMIC OUTLOOK 2002 SEMINAR, CITIBANK- JAKARTA, April 8-9, 2002.

INTRODUCTION

· What have been transpiring from the macroeconomic management, monetary and banking sectors in particular.
· Problems and challenges in the near future
· Some caveats: My assessments are based on my experience in past works within the Indonesian Monetary Authorities, and my background as a monetary economist. However, I have been away from the scene for more than four years.


A FRAMEWORK

· There are, at least, three crucial requirements for policies addressing contagion to be effective that produce a turning point and sustainable recovery that include:
1. Prompt acknowledgment and acceptance of the crisis
2. Prompt action to design workable adjustment policies
3. Consistent implementation
· Strong growth of the world economy, the locomotives in particular, would help.
· A casual observation on what had been unfolding in the Asian crisis countries seems to suggest the validity of the above explanation on whether and how a crisis country would fare in its effort to address the crisis.
· Inconsistencies had been the main features of Indonesian policy implementation. Indonesia had been experiencing a muddling through process in resolving the crisis from the governments under Soeharto, Habibie and Abdulrahman Wahid.

BRIEF LOOK AT THE PAST

· The Indonesian case is peculiar among the crisis countries of Asia. In spite of similar or even better economic fundamentals at the outset of the crisis, plus early policy responses that were well recognized as being proper and prudent, Indonesia had been known as a basket case.
· The Indonesian crisis: It is home grown, but certainly not home alone. What went wrong and how did it happen?
· Thailand, Korea, Malaysia and the Philippines were well ahead in their recovery after the turning points. In 1999 they were back to their pre-crisis levels in some of their macro economic performances: exchange rates, level of reserves, economic growths and others (V-shaped curve)
· Indonesia was still in its struggle to consolidate its turning point towards recovery. In fact, Indonesia was wasting the momentum and losing a golden opportunity in 1999. The government of President Wahid failed to consolidate the good start and to mobilize the friendlier domestic and external environment for Indonesia's recovery.


ASSESSMENT OF CURRENT DEVELOPMENT

· An euphoric public and market welcoming President Megawati and her government. Domestic and external supports of the new government
· However, the ghosts of the past and the muddling through of resolves in addressing the crisis have been constraining the government efforts for consolidating the weak turning point into a recovery and beyond
· There is rampant inertia. Confronting with complicated problems in new environments -- the process of practicing democracy and enhancing transparency and governance in a global economics and finance -- the risk of failures is bigger. Are leaders becoming more risk - avert or taking too much political calculation in the conducts of governing?


ISSUES IN POLICY AND IMPLEMENTATION

General
· Exchange rate policy: from managed floating and crawling peg to free float in the era of bipolar system and corner solutions. Lingering issue on what is the 'right' exchange rate system for Indonesia?
· Is independent central banking still an issue? Issues on amending the central bank law.
· What is the Vice President recovery program?
· What is the Fund's role?

Specific
· Problems of debts: problems with respect to the size and the servicing (sustainability) for both government and corporate. Foreign public debts (USD 70 billion, USD 5.5 billion needs to be restructured through Paris Club), domestic debts (USD 66 billion with 50 billion rupiah service payment annually). And corporate debts?
· Bank restructuring and sales of assets under IBRA: reflection on recent developments : cement Gresik and BCA
· Privatization : political and economics issues


CONCLUDING NOTES

· The new paradigms for economic management in a global era. The global economic and finance demands micro-macro consistency in economic management that has to go hand in hand with transparency, accountability and governance, a democratic system. Economic management has to be based on and guided by these paradigms.
· Recent improvements have given some breathing space. But, they could not provide the national economy with more needed certainty and safety for doing business, returning of capital parked abroad as well as new foreign investments
· The political elite has not been forthcoming in term of their resolves for addressing the national issues; it is unlikely that a breakthrough could come out prior to 2004.

Jakarta, April 2002