1983-1993 a critical period in RI's financial history

1983-1993 a critical period in RI's financial history

Financial Sector Deregulation,
Banking Development and Monetary Policy
The Indonesian Experience 1983-1993
Binhadi
Published by Indonesian Bankers Institute, 1995
Pp XXXIV + 540

JAKARTA (JP): From the years 1983 to 1993, no less than 11
deregulation packages and a new banking bill were approved within
Indonesia's financial and monetary sectors, shaking the very
foundation of the established financial mechanism upon
implementation of these new strategies.

Author Binhadi presents a review of this critical as well as
important period in Indonesia's financial history.

The process of change began with the introduction of a
liberation policy of interest rates in June 1983. In October
1988, the second deregulation package followed, bringing
structural reformation. Deregulation in February 1991 and May
1993 brought improvement and precautionary measures to banking
operations. The March 1992 deregulation package covered
reformation of the legal structure.

The deregulatory measures were issued with one and the same
objective: to prune government intervention in these sectors in
stages.

Deregulation became an unavoidable measure after the effects
of the global recession in the early 1980s began to be felt in
Indonesia in 1982. Economic growth nosedived to 2.3 percent
during that year, the state balance deficit rose from $0.4
billion to $1.9 billion, while export earnings from oil deflated
from $9.6 billion to $6.5 billion.

The government promptly rescheduled several development
projects, skimping on subsidies for foodstuffs and basic
supplies. The rupiah underwent a 38 percent devaluation. In
addition, a new tax bill was later introduced in 1984 to generate
more income for the government.

Some development projects were able to go on, because the
government continued borrowing foreign loans. Public funds began
to assume a greater role in the financial, monetary and banking
sectors to achieve increased efficiency.

A series of deregulation policies became effective in the
monetary sector with the June package in 1984. The package
altered the basic policy of the monetary sector, cutting down
direct intervention to instrumental intercession, thereby
facilitating open-market operations, discount facilities and a
reserve requirement mechanism. The measure aimed to maintain a
hold on the total money circulation, level of interest rates and
foreign exchange transactions.

To round out the package, the Central Bank (Bank Indonesia)
later introduced Bank Indonesia Certificates and money market
securities to facilitate open-market operations.

The initial deregulation continued to surge and -- like a
strong electrical current -- ignited the banking sector. In turn,
the following packages were issued: PAKTO (October Package) 1988,
PAKMAR (March Package) 1989, PAKDES (December Package) 1989,
PAKFEB (February Package) 1991. These measures culminated with
the launching of the 1992 banking bill.

With the deregulation packages, a simple strategy which
generated spectacular results proved its effectiveness. Banking
opportunities, through PAKTO 1988 in particular, became readily
available. The effects of this deregulation were awesome. The
total number of commercial banks grew from a mere 124 in October
1988 to 240 in 1994. Bank offices rose from a total of 1,900 to
6,000 throughout Indonesia.

On the local scene, an improved credit system was accomplished
with the deregulation of January 1990, which lessened the
importance of credit liquidity in the national credit system. The
strategy grew further with the May package of 1993, which led to
a relaxing of capital adequacy ratio terms, designed when credit
growth in 1992 and early 1993 slowed down considerably.

During that period, a revitalized capital market also gained
momentum as a result of various deregulation packages: PAKDES
1987, PAKDES 1988 and PAKDES 1990. A revision of the capital
market was implemented through these deregulations as well. The
government took a back seat concerning price fluctuations of the
capital market, listing processes were made easier, and a branch
of the stock exchange was established.

In addition, the government also began to induce a protective
rule for investors in an effort to raise the Indonesian stock
exchange's credibility overseas.

The post-1983 period made it evident that the deregulations
held positive results for the Indonesian economy. An average
growth rate of 5 percent was recorded until 1988. Yearly
inflation was down at 7.2 percent. Non oil exports surpassed oil
from 1987 on.

A spirited stock exchange moved from 24 listed companies in
1987 to more than 200 firms at present. In the banking sector,
the 1988 PAKTO deregulation brought new banks into existence,
although overheating of the economy gave at the same time cause
for worry. The situation cooled down under a tight money policy
induced in 1990.

In his book, author Binhadi has successfully managed to
analyze the various phases of change taking place within the
financial, monetary and banking sectors in a comprehensive way.
More than that, he was able to infuse new spirit at the onset of
every changing stage. This is not wholly unexpected, taking into
account the 35 years of work experience the writer achieved with
Bank Indonesia. He also played a key role in the formulation of
some deregulation packages at the time. His direct experience
gives color and perspective to his work. The author's coverage of
an interesting and active period in Indonesia's financial history
makes this an important and valuable book.

-- Yuswohady