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.