Monetary Policy Sri Adiningsih, Ph.D.

Interest rate, Credit, & Money The Role of Monetary Policy Economic Activity Interest rate, Credit, & Money Monetary System Monetary Policy

Tujuan Kebijakan Moneter: Internal balance External balance Internal Balance Menjaga inflasi supaya rendah Tercapainya laju pertumbuhan ekonomi yang tinggi Tercapainya kesempatan kerja yang tinggi External Balance Keseimbangan neraca pembayaran (BOP)  dalam sistem perekonomian terbuka seperti Indonesia, kedua target keseimbangan ekonomi itu saling terkait atau memerlukan penyelesaian secara simultan.

Kebijakan Moneter Pengendalian permintaan (demand management) Target moneter (monetary targetry) Demand management dalam kaitan dengan pengendalian inflasi dilakukan dengan menjaga agar permintaan uang, barang dan jasa dapat dipertahankan pada tingkat yang tidak mendorong inflasi (non inflationary level) Target moneter atau lebih khususnya target jumlah uang beredar atau pengendalian JUB atau suku bunga. Kebijakan yang dapat dilakukan antara lain dengan menurunkan jumlah uang primer, menaikkan cadangan wajib (reserve requirement) dan menaikkan suku bunga.

Monetary Policy Instruments Open Market Operation Reserves requirement Credit selection Moral suasion Efektivitas Kebijakan Moneter dipengaruhi: Ada tidaknya tujuan yang saling bertentangan tingkat moneterisasi masyarakat faktor kelambanan (time lag) Pengaruh lembaga keuangan Asa (expectations) masyarakat Faktor yang mempengaruhi variable target

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 Indonesia’s 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 Indonesia’s 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 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

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

Figure 1. Indonesia’s Inflation Rate & Interest Rate (%) Sources: Bank Indonesia, & US Federal Reserve

Gambar 1. Pertumbuhan Ekonomi, Inflasi dan Tingkat Bunga, 1991-2007 (%) * Pertumbuhan PDB tw 1 s.d tw 3/07 terhdp tw 1 s.d tw 3/06 (6,3%) Inflasi: 6,71% (YoY Nov 2007), dan Tingkat Bunga BI rate: 8% (6 Des 2007) Sumber: BPS dan Bank Indonesia

Mo, M1, & M2 (trillion Rp) Sources: Indonesian Financial Statistics BI

Mo, M1, & M2 Growth (%) Sources: Indonesian Financial Statistics BI

M1 & M2 (% of GDP) Sources: IFS IMF & Indonesian Financial Statistics BI

Money Supply, Interest Rates, & International Reserves Year M1 (bilion Rp) M2 SBI 1 month (%) Int’l Reserve (milion US$) (% of GDP) 1970 243 323 - 156 7.3 9.7 1980 6,476 10,147 5,392 14.2 22.3 1990 20,559 58,526 18.8 7,459 27.8 1996 64,089 288,632 12.8 18,251 12.0 54.2 1998 101,197 577,381 38.44 22,713 10.6 60.4 2000 162,186 747,028 14.53 28,502 59.1 2003 223,799 955,692 8.31 34,962 12.5 53.5 2004 253,800 1,033,500 7.43 36,320 11.0 44.9 Sources: IFS IMF & Indonesian Financial Statistics BI

International Reserve (billion US$) Sources: IFS IMF & Indonesian Financial Statistics BI