Monetary Policy

Sri Adiningsih, Ph.D.

The Role of Monetary Policy

Monetary Policy

Monetary System

Economic Activity

Interest rate, Credit, & Money

Tujuan Kebijakan Moneter:• Internal balance• External balance

Internal Balance• Menjaga inflasi supaya rendah• Tercapainya laju pertumbuhan ekonomi yang tinggi• Tercapainya kesempatan kerja yang tinggiExternal 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.

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 suasionEfektivitas 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

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.

MONETARY 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 supervisionBy 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

Sumber: Laporan Tahunan Bank Indonesia

  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 895.51006.

71030.

51099.

71112.

21213.

51272.

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 5.8 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 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

Sources: Bank Indonesia, & US Federal Reserve

-10

10

30

50

70

90Ja

n-9

1

Jan

-92

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-93

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-94

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-95

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-96

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-97

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-99

Jan

-00

Jan

-01

Jan

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Jan

-04

Jan

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Jan

-07

Jan

-08

I nflation

BI Rate

Fed Fund Rate

Figure 1. Indonesia’s Inflation Rate & Interest Rate (%)

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

-20

-10

0

10

20

30

40

50

60

70

80

90

1991

1993

1995

1997

1999

2001

2003

2005

2007*

P ertumbuhan P DB

InflasiTingkat Bunga

Mo, M1, & M2 (trillion Rp)

Sources: Indonesian Financial Statistics BI

0

200

400

600

800

1000

1200

1979 1984 1989 1994 1999 2004

M0 M1 M2

M0

M1

M2

0

10

20

30

40

50

60

70

1980 1984 1988 1992 1996 2000

Mo, M1, & M2 Growth (%)

Sources: Indonesian Financial Statistics BI

M1 & M2 (% of GDP)

M111.02

12.82

10.5911.5912.1010.4411.039.897.22

9.61

M244.88

15.8016.96

23.89

42.98 48.98

60.41

59.06

0

35

70

1970 1975 1980 1985 1990 1995 2000

Sources: IFS IMF & Indonesian Financial Statistics BI

Money Supply, Interest Rates, & International Reserves

Year

M1 (bilion

Rp)

M2 (bilion

Rp)

SBI 1 month (%)

Int’l Reserv

e (milion

US$)

M1 (% of

GDP)

M2(% 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 9.7 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 12.8 59.1

2003 223,799 955,692 8.31 34,962 12.5 53.5

2004 253,8001,033,50

0 7.43 36,320 11.0 44.9

Sources: IFS IMF & Indonesian Financial Statistics BI

Sources: IFS IMF & Indonesian Financial Statistics BI

International Reserve (billion US$)

36.32

28.50

0.16

5.397.46

0

10

20

30

40

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004