IMF executive calls for independent central bank
IMF executive calls for independent central bank
JAKARTA (JP): A top executive of the International Monetary Fund (IMF) expressed optimism yesterday about Indonesia's macroeconomy and called for greater independence for the central bank in order to maintain macroeconomic stability.
Stanley Fischer, the fund's first deputy managing director, announced after meeting President Soeharto that Indonesia's impressive economic performance made it unnecessary for the country to borrow from his institution.
The fund barely needs to encourage the government to continue its policies, including the finance policies it has adopted responsibly, Fischer said.
He said Indonesia has not borrowed from the IMF for 10 years, and he does not expect it to start doing so now that Indonesia has no problem with its balance of payments.
Unlike the World Bank, the IMF does not provide project financing. The IMF only extends loans to countries which suffer serious deficits in their balance of payments.
Fischer said he and President Soeharto discussed the maintenance of Indonesia's macroeconomic policy to sustain high economic growth.
Speaking at a business gathering later, Fischer suggested that Indonesia assure its central bank's independence in order to maintain macroeconomic stability.
A number of parties question the independence of Bank Indonesia, the central bank. Many of its policies are directed or influenced by the Ministry of Finance.
Fischer noted that governments in several countries have strengthened their respective central banks' independence and formalized the setting of monetary policy goals and procedures to sustain macroeconomic stability.
"By macroeconomic stability I mean preventing overheating and maintaining low inflation," Fischer said.
"Macroeconomic stability matters because inflation and stop-go policies are bad for growth. It matters also for sustaining the region's record of equitable growth because inflation not only tends to retard growth but also has a direct and heavy incidence on the poor," he continued.
He said inflation is bad for growth and is correlated negatively with growth even when lower than 8 percent a year.
Indonesia has recorded annual inflation rates over 8 percent for the past three years -- 9.77 percent in 1993, 9.24 percent in 1994 and 8.64 percent last year.
The primary mandate of an independent central bank, Fischer said, is to protect the value of the currency, that is, maintaining low inflation.
It may also be given the mandate of maintaining full employment and promoting economic growth, to the extent that these goals do not conflict with those of maintaining the value of currency.
"In this monetary policy area, there is growing recognition of the benefits of an independent central bank, charged with a clear mandate," Fischer noted.
Fischer said central bank independence means an explicit and credible commitment to sound fiscal policy,
An independent central bank, he said, will go a long way to ensure sound macroeconomic policy and thereby assure the private sector of the stability of the framework in which they will be working and investing.
Fischer also indicated that central bank independence is important to mitigate the problem of capital inflows, especially those with short-term maturities, in the face of potential economic overheating.
Capital inflow problems severely complicate monetary policy, especially if, like Indonesia, a country with an open capital account cannot fix both its exchange rate and set domestic interest rates independent of world levels.
"To be sure, this region has experienced less volatility, and a better mix of capital flows -- and here I refer to the predominance of direct and equity investments -- than other emerging markets," Fischer said.
"Nevertheless, the region has not escaped the macroeconomic dilemmas created by powerful capital flows," Fischer warned.
He noted that policymakers in many countries have attempted to attract longer-term inflows, such as foreign direct investment, and to discourage short-term inflows because they pose the greatest threat to stability.
"There is no easy way out of the capital inflows problem, but it is certainly easier to deal with if the fiscal policy can be tightened," he said. (rid)