The apathy of RI financial sector

By H.M.T. Oppusunggu

JAKARTA (JP): One could be quite baffled by the oddities of Indonesia's economic development since August 1997.

For example, the central bank, Bank Indonesia, has turned out to be a major force behind the demolition of the financial sector.

Monetary turmoil brought on the downfall of the economy which resulted in drastic drops in income and employment, particularly affecting the silent majority: the poor. All this happened in a very short period of time and was not due to the fault of the public. The situation was further compounded by the heavy engagement of the International Monetary Fund (IMF) in advising and supporting BI in its monetary policies.

The fundamental point is that when BI was under inadequate leadership the IMF exploited this weakness as part of its ulterior motive to make Indonesia a country permanently begging for outside assistance.

The Fund generously extended a huge loan of US$43 billion which has been used by Indonesia to repay its foreign debt. Thus in essence, the IMF has been acting as a discreet substitute for foreign creditors, so that not a single cent of the IMF loan has been used for generating economic recovery.

It remains unclear as to how Indonesia will be able to fulfill its commitment to pay back its accumulated foreign debt of US$40 billion bound to mature by the year 2004.

Both BI and the IMF have been misleading our people. Wittingly or unwittingly, this was done to alleviate continuous levels of public distrust and concern over dreary prospects.

Time and again, letters of intent -- jointly formulated by BI and IMF -- had stressed that their policies had paid off well, as the economy was said to be already underway towards recovery.

Their officials claimed that gross domestic product (GDP) had grown by 4 percent to 5 percent in 2000 as compared to a sudden drop of 14 percent in 1998 and zero growth in 1999.

The upward trend was considered to have been accompanied by a significant increase in foreign exchange reserves and one digit inflation.

At closer examination however, GDP growth was more apparent than real, as it was not actually attributed to real production factors. The growth in GDP and foreign exchange reserves were primarily due to sharp increases in oil prices.

Further, there was a significant redirection of goods from the declining domestic market into exports.

Low inflation was heavily supported by subsidies of substantial imports of rice, without which the price of rice -- and thus inflation -- would have been higher than indicated by the official inflation index; so that the real growth of GDP during 1998-2001, if any, would be much lower than had been presented by BI and the IMF.

Above all, BI and the IMF lost sight of the employment level which remained depressed and the poor were even more miserable than before.

This financial conspiracy between BI and the IMF persistently deprived the real sectors of the economy of their fundamental need for infrastructural monetary services and facilities.

At present it would be fatalistic and futile to expect even the slightest recovery unless Indonesia's financial and banking sectors are restored to a sound position.

The most compelling imperative is to thoroughly revamp BI and return it to its proper function as a central bank, away from its errant activities, in which it acts as if it were an owner or operator of all individual national banks.

BI must, once again, hold command of money and foreign exchange. Its free floating exchange rate should be revoked to avoid soaring prices of imports and related production costs. Otherwise the trend of shutting out foreign investment in the domestic market will no doubt continue.

The IMF should also refrain entirely from its meddling in BI's independent monetary policy.

Another basic prerequisite is that, if monetary or economic policy is to be effective, it must consist of a set of properly coordinated guidelines, as well as measures and instruments used to pursue clearly defined aims.

Had BI understood the implication of its negligence in adhering to this basic principle, the current monetary collapse would not have happened.

The writer is a senior Indonesian economist based in Jakarta.