BI is the source of monetary crisis

Sumber Krisis Moneter (Source of the Monetary Crisis); By H.M.T. Oppusunggu; Kepustakaan Populer Gramedia, Jakarta, 1998; 221 pp + x; Rp 17,500

JAKARTA (JP): In the medical world, a doctor's diagnosis is very important for the patient's therapy. Knowledge of the source of the ailment leads to the correct diagnosis and the cure can start immediately.

The monetary crisis in other ASEAN countries, like Thailand and Malaysia, is not as grave as the one in Indonesia, which, in comparison, looks bewildered in facing the monetary crisis.

Many ways have been tried to overcome the monetary catastrophe. The President has even established a Council for Economic and Monetary Resilience. But the layman is exposed to confusion because experts and officials have raised diverse causes for the disease of the Indonesian economy.

What, then, is the source of the Indonesian monetary crisis? This book offers a clear-cut answer through its three sections.

The writer, a senior economist and former expert at the Bangkok-based Economic and Social Council for Asia and the Pacific, a United Nations agency, presents a brief monetary theory in the first section. This part is technical and scientific.

It is in section two that the writer discusses the sources of the crisis here. The essence is that all the sources of the monetary crisis originate in Bank Indonesia as the central bank.

The writer says there are 10 "errors" on the part of Bank Indonesia (BI). The fatal one being Bank Indonesia's paralysis, its incapability of functioning as a central bank.

Bank Indonesia failed to implement one of the functions of a central bank, that is, to determine the interest rate of the macroeconomy.

Bank Indonesia did not operate as central banks in other countries normally do, namely as a nonprofit institution. In reality, Bank Indonesia operates at high cost, gaining high profits in the same way as the commercial banks it must guide and supervise.

As a seller of foreign exchange, for example, Bank Indonesia gained from the difference in buying and selling rates (spread) of foreign currencies.

Bank Indonesia also obtained profit from high interest rates charged to users of loans from the International Governmental Group on Indonesia and later the Consultative Group on Indonesia, even though Indonesia receives the loans at low interest rates.

Bank Indonesia's operations have gone so far that the extent of its central role as the only institution implementing and responsible for monetary policies was neglected.

This, according to the writer, was the cause of Indonesia's inability to immediately rise from the pressures of the monetary crisis as experienced by Malaysia and Thailand.

"In the United States, the interest rate fixed by the central bank, in this case the Federal Reserve Bank, determines the money in circulation. Likewise in the Philippines, Korea, Malaysia, or Thailand. In these countries the interest rate is a very effective monetary instrument." (p. 191)

Way out?

Opposunggu's suggested solution: First he urges that the central bank must immediately solve the problem of its monetary mismanagement, so as to allow the private sector to obtain money supplies from abroad.

"The monetary mismanagement has caused the substitution of domestic funds by foreign funds and resulted in a national tragedy: Indonesia has become the second-biggest foreign exchange debtor country in the world." (p. 201)

Second, Bank Indonesia should not hesitate to consult with, and request aid from, the IMF and the International Bank for Reconstruction and Development, to formulate a comprehensive study and concrete steps toward the management of the monetary disaster.

Third, the problem of Bank Indonesia's paralysis can be solved if the obsolete Bank Indonesia law of 1968 is fundamentally changed.

Fourth, mending the internal matters of Bank Indonesia itself. This comprises the duty and expansion of personnel of the Monetary Council, coordination of monetary and fiscal policies, control of money in circulation and bank loans, determination of interest of various monetary and financial instruments and control of foreign exchange and the balance of payment.

The book was just going to press when the controversy of the currency board system (CBS) surfaced, and the subject is included in the three annexes at the end of the book.

The part on the CBS describes the system in Hong Kong and concludes: "The CBS is only suitable for small-scale and homogeneous economies and banking activities, like in Hong Kong..." (p. 216)

An open letter to IMF Managing Director Michel Camdessus from the writer is another part of the annex, which discusses the Letter of Intent.

This book, by a senior economist, may be a valuable contribution to the urgent debate going on here for the country's future, both for involved officials and lay readers.

-- R. Masri Sareb Putra

The reviewer is an editor with a book publishing house in Jakarta.