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)