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