Central bank message
Central bank message
Soedradjad Djiwandono, the Governor of Bank Indonesia (the central bank), has much to tell domestic and foreign bankers. His institution shoulders the responsibility of coping with a potential macro-economic imbalance caused by the high inflation rate and a large deficit in the current account of the balance of payments.
Predictably, the central theme of his Annual Bankers' Meeting address before 300 domestic and foreign bankers on Friday evening revolved around concerted efforts to cool the economy.
The audience possessed the ability to either support or sabotage the central bank's monetary policy, since banks and non- bank financial companies provide the fuel for economic activity.
Soedradjad urged banks to limit their credit expansion this year to 16 percent, compared to almost 25 percent last year -- which itself was higher than the original target of 19 percent -- and to refrain from commercial overseas borrowings. The high credit growth rate and large overseas borrowings obviously helped widen the current account deficit last year.
The strong appeal followed the tougher monetary policy introduced by the central bank in the fourth quarter of last year. The policy included an increase in the reserve requirement of banks and restrictions on derivatives trading and on non-bank financial companies.
The central bank needs full cooperation from the financial community. The task of cooling down the economy is not simple, especially since the government has set this year's economic growth target at 7.1 percent. Most economists are pessimistic that imports -- a major cause of the huge current account deficit -- can be cut so sharply without choking economic growth.
The dilemma is obvious. Investment must expand and exports of manufactured products must increase significantly to generate growth. But Indonesia relies mainly on imports for capital goods and the manufacturing sector depends largely on imported raw and intermediate materials.
Despite the limits to curbing import growth, banks can still support the monetary management by focusing their lending on the most productive businesses, ones which augment exports. Last year, the property sector enjoyed the highest growth in loans from private banks. That kind of development certainly does not support a monetary policy designed to ensure a sustainable level of high economic growth.
Banks can also help reduce inflationary pressure by improving the quality of their loans. The high credit expansion by private banks last year illustrated a worrisome trend. Many of the loans went to affiliated companies and were above the legal lending limits set by the central bank. This trend might set off another big wave of bad loans at a time when most major banks are still struggling to settle large sums of doubtful and bad credit.
Soedradjad's assertion that the number of banks violating the legal lending limits has become alarming is indeed worrisome. This shows how several banks, notably the ones belonging to politically-well connected business groups, can readily ignore the central bank's rulings. At the same time, the violations also indicate the limitations inherent within a central bank which doesn't have one iota of political independence.
Soedradjad's strong appeal to improve cooperation and understanding between the monetary authority (government) and the business community, notably the financial industry, must be underlined. And, in view of the political scheme of things in which the central bank must operate, the monetary authority also needs cooperation and understanding from other government agencies.
If the overheating economy does not show signs of cooling within the next few months, the international market will penalize our economy with massive capital outflows and the stoppage of capital inflows. This might trigger monetary instability and will retard economic growth. Further down the line, the government might be forced to take drastic measures which would demand great sacrifices from the business community and the public.