Monetary Policy

Sri Adiningsih, Ph.D.

The Role of Monetary Policy

Economic Activity

Interest rate, Credit, & Money

Monetary System

Monetary Policy

Objective of Monetary Policies: Internal balance External balance Internal Balance Maintain price stability Hight economic growth Full employment External Balance Balance of payment is balance (BOP) Indonesia is an open economy, internal and external balances are important

Monetary Policies: demand management monetary targetry Demand management is done through managing the demand of good and services such that at non inflationary level. Monetary targetry or managing the value of money supply or interest rates.

Monetary Policy Instruments: Open Market Operation Reserves requirement Credit selection Moral suasion

MONETARY POLICY IN INDONESIA

Old Regime period monetary policy was direct monetary authority tightly controlled the monetary sector bank were extended hand from the State state budget deficit was financed by loan from Bank Indonesia the inflation became uncontrollable (reaching 635% in 1966) the economy condition experienced a stagnation New Order period Promulgated stabilization program through a balance budget policy money circulation was controllable Encouraged investment (both foreign & domestic) UU PMA & UU PMDN Banking operation UU no.14 of 1967 (Banking Laws) and UU no.13 of 1968 (Bank Indonesias Laws) Inflation rate under control declined (635% in 1966 to 10% in 1969) and even just 2,5% in 1971 stability program success

MONETARY POLICY
Environment before deregulation low level of monetization (ratio of money supply to GNP) banking network has not been well-spread banking technology has not been develop capital market has not been developed The constraint can result in a less effective monetary policy. the structure of supporting means of monetary policy in the form financial and non financial institution still inadequate financial sector dominated by bank assets in monetary sector dominated by 6 State Banks, even though shows a declining trend by the deregulation policy.

The world economy slackened in 1981/1982 limited government funds: oil prices adjustment policies: devaluation, project scheduling and banking deregulation of June 1,1983 (Monetary Reform 1983) Monetary and financial reforms in June 1983 state bank were permitted to set some deposit and lending rate (except priority programs) Credit ceiling removed launched open market operations

Promulgating October 27, 1988 package: reduce minimum reserves from 15% to 2% easing to open new bank or branches easing requirements to set up new foreign exchange banks BUMN funds could be invested in private banks and non banking institutions
Led to accelerated growth of number of banks, assets, resources mobilization, more diversified product & greater service, & efficiency Resulted several problems: mismatch (maturity problems), loan pricing, supervision, legal and accounting problems

Bank Indonesia responded with new policies of supervision in 1991: Capital Adequacy Ratio (CAR) 8% Net Open Position 20% Prohibition lending for securities trading Minimum experience requirements for bank directors Staff training and minimum soundness before opening new branches

Indonesian Crisis
the collapse of the exchange rate: Rp2500/USD Rp15000/USD economic contraction: 7.8% (1996/97) -13.2% (1998) the $22 billion reversal of private capital flows, from inflows of $10 billion (1996/97) to outflows of $12 billion (1997/98) is nearly as large as total net capital flows in the entire decade to 1985-95 the price of Indonesias key export, oil, has fallen to $13 a barrel, its lowest level in real terms in 30 years enormous political changes are taking place

BANKING RESTRUCTURING IBRA established in January 1998 Recapitalization: Rp430 trillions Closing and merger bank: BLBI Full Blanket Guarantee Strengthen regulation and supervision

By the end of year 2000 there were modest signs of a banking recovery: NPL have dropped to average 18% CAR improved to positive of more than 4 Some banks have returned to profitability

RESPONSE TO CRISIS 1997/1998 Central Bank of Indonesia independency: UU no.23/1999 Managed Floating Free Floating Exchange Rate Banking International Settlement (BIS) principles Money Laundering Financial Action Task Force (FATF/PPATK) Free Capital Movement: UU no.24/1999

Monetary Policies after the crisis: Objective: maintain price stability (low inflation) Inflation targeting framework since 2005 Free Floating Exchange Rate (Managed floating?)

RESPONSE TO GLOBAL ECONOMIC CRISIS 2008:

Expantionary monetary policies through lowering interest rates and some other policies such as allowing bank not using mark to market for its Surat Berharga Negara hold in its balance sheets.

Indikator Kinerja Bank Umum 1998-2004

1998 Jumlah Bank Jumlah Kantor Bank Total Asset Dana Pihak Ketiga Kredit LDR (%) NPL - gross(%) NPL - net(%) Modal CAR Laba (rugi) sblm pajak Net Interest Income 208 7661 895.5 625.4 545.5 72.4 48.6 34.7 -129.8 -15.7 -178.6 -61.2 1999 164 7016 1006.7 617.6 277.3 26.2 32.8 7.3 -41.2 -8.1 -75.4 -38.6 2000 151 6397 1030.5 699.1 320.4 33.2 18.8 5.8 53.5 12.5 10.5 22.8 2001 145 6657 1099.7 797.4 358.6 33 12.1 3.6 62.3 20.5 13.1 37.8 2002 141 6886 1112.2 835.8 410.3 38.2 8.1 2.1 93 22.5 22 42.9 2003 138 7621 1213.5 888.6 477.2 43.5 8.2 3 110.8 19.4 26.4 49.5 2004 134 7826 1272.1 963.1 595.1 50 5.8 1.7 118.6 19.4 41.1 65.8

Sumber: Laporan Tahunan Bank Indonesia