Strengthening Macroeconomic Stability

Economic stability is a basic prerequisite for improving public welfare through the achievement of high growth and improving the quality of growth. Economic stability is very important to give business certainty for economic actors. Macroeconomic stability is achieved when the relationship of the main macroeconomic variables are in balance, for example between domestic demand with national output, balance of payments, fiscal revenues and expenditures, and savings and investment. Relationships are not always in perfect balance. Imbalances such as fiscal and balance of payments remained in line with economic stability provided that can be funded on an ongoing basis.

Unstable economy raises high costs for the economy and society. Instability would complicate the public, both private and domestic, to plan ahead, especially in the longer term needs for investment. Low level of investment will reduce the potential for long-term economic growth. High fluctuations in output growth in production will reduce the level of expertise of the old workforce is unemployed. High inflation and high fluctuations cause enormous costs to society. Due to the brunt of high inflation would be felt by poor people has decreased purchasing power. High inflation makes it difficult distinction fluctuating price movements caused by changes in demand or supply of goods and services from a general increase in prices caused by excess demand. The result is inefficient allocation of resources.

Given the importance of macroeconomic stabillitas for fluency and achievement of national development targets, the Government is determined to continue to create and consolidate macroeconomic stability. One-way 2005-209 macroeconomic policy framework is to maintain macroeconomic stability and prevent excessive fluctuations in the economy.

To achieve macroeconomic stability not only depends on the magnitude of macroeconomic management alone, but also depends on the structure of markets and sectors. To consolidate macroeconomic stability, macroeconomic policy, through fiscal and monetary policies in a coordinated well, must be supported by structural reform policies, which aimed to strengthen and improve the function of markets, including, among other capital and money markets, labor markets and market goods and services, and covers sectors such as industry sector, agriculture, trade, finance and banking, and other sectors.

A. ISSUES

Sound macroeconomic management and progress in structural reforms has resulted in steady improvement of economic performance, especially macroeconomic stability. In recent years, relatively stable exchange rate, inflation under control at a fairly low level, as well as external activities have begun to recover. Maintained market confidence since the end of the support the IMF program at the end of 2003. In addition, the return of Indonesia in international capital markets has been marked by the successful issuance of foreign bonds which basically reflects international confidence in the implementation of national economic policy.

Macroeconomic stability is still vulnerable to shocks. On the financial side of the country, still faces a threat to fiscal sustainability. The ratio of debt per GDP is still relatively high which is estimated about 55 percent of GDP by the end of 2004. In recent years the amount of government bonds with maturities will reach its peak. On the other hand the level of revenue, especially taxes, are still far from optimal than the potential revenues available. On the expenditure side, spending is still not optimal effectiveness and budget leaks still occur in various institutions, both at central and regional levels. The challenge in the next five years is to perform loan management, both public and domestic luara, the better, increase revenues and streamline state spending in order to maintain fiscal sustainability.

The rate of inflation and interest rates are relatively higher compared to the countries region. Economic development until 2003 was marked by the strengthening of the exchange rate reaches Rp8.465/USD and low inflation rate of 5.03 percent. These conditions cause a decrease in the level of 3-month SBI interest rate of 13.12 percent (2002) to 8.34 percent (2003). Decrease in interest rate policy affects the investment credit interest rate cut from 17.8 percent to 15.7 percent. However, when compared with neighboring countries, where inflation and interest rates respectively ranged from 0.5 percent - 1.8 percent and 1.0 percent - 2.8 percent, conditions are still less competitive. Monetary policy needs to be carefully nurtured in order to reduce the rate of inflation, and facing challenges due to the high expectations of inflation, high excess liquidity, the rising pressure of administered prices, the weak structural condition that would affect the interaction of demand and supply of goods and services as well as the possibility of rate hike interest abroad.

The balance of payments need to be wary of the rise of non-oil export earnings are slowing. The value of non-oil exports in 2000-2003 grew at an average only about 4.7 percent per year, far below the average pre-crisis (1991-1997) which is about 22.6 percent per year. Compared with other competing countries in the region, Indonesian non-oil export performance was relatively slow. This shows a decrease in the competitiveness of Indonesian non-oil exports. Surplus oil and gas exports, regardless of the price increase, also showed a declining trend. The reduced domestic oil production and continued growth in fuel consumption has increased its crude oil imports, while exports of crude oil declined. LNG exports showed the tight competition, with the increasing supply of LNG from a variety of new exporting countries. As a result other than Indonesia suffered defeat in several LNG supply tender, also came under pressure to lower prices on old LNG contract to be extended.

Increased imports are too fast, without offset by non-oil exports would push the current account position. In 2004 imports of both oil and non-oil, showed a rapid increase in line with the improving economy. This trend will continue in line with increased investment. To secure the balance of payments poisisi this needs to watch out for, especially the position of the services account deficit also tends to increase.

The amount of capital inflows, particularly foreign direct investment is still relatively low compared to before the crisis and the countries in the ASEAN region. In line with efforts to reduce the burden of foreign debt, capital flows tend to be government deficit. Private capital flows in recent years in deficit, but the number continued to fall in line with the reduced flow of private foreign debt payments and the improvement in capital inflows to Indonesia.

By observing the development of exports, imports and capital inflows, in order to secure the balance of payments position in the next five years should be measures to increase exports, especially non-oil exports and exports of services, such as tourism and shipping services, as well as measures to increase investment flows.

Real sector has not recovered. This is reflected in the lack of structural conditions, such as food insecurity, weak industrial production structure, the lack of distribution facilities and transportation and has not solid state banking and financial institutions. On the banking side, although there have been improvements, the banking intermediary function has not been optimal. Credit growth is still relatively low, where the Loan to deposit ratio (LDR) is still relatively low, namely 43.2 per cent compared to pre-crisis levels of about 70-80 percent. In addition, loans that are not carefully by the bank to make the NPL are in the range of 7-8 percent. This condition is mainly caused by the still not completed restructuring the corporate sector and the high risk in the real sector related to various structural problems. In addition, banking crimes still often the case, this negatively impact public confidence in the banking system has not recovered fully from the banking crisis. This condition is caused by yet powerful application of risk management and prudential management of banks and still need to increase the ability of bank supervision by Bank Indonesia.

The condition of banks and other financial institutions has not been steady. Meanwhile, banking and financial products become more varied and complex, globalization of trade in services and innovation in information technology have increased the flow of financial transactions in and out of Indonesia and the tendency of concentration of assets of financial institutions in the banking sector (about 80 percent in 2003). This implies the strength of the threat of a crisis of financial institutions, particularly banks, in the future. On the other hand institutions that deal with crisis prevention and management mechanisms such as the Financial Services Authority institutions (OJK) and the Deposit Insurance Corporation (DIC) is not yet fully operational.

The growth of various financial products that fast (like mutual funds), potential risks if not accompanied by adequate regulation and supervision. The net asset value (NAV) of mutual funds in 2003 has reached more than 8.6 times the NAB in 2001. Jump in accumulation of funds in the mutual fund industry requires setting that always focuses on the principles of prudence and justice.

The potential mismatch between long-term funding (such as infrastructure development, the budget deficit financed by issuing bonds) with a source of funding is still short term. In 2003 until mid-2004, about 80-90 percent of time deposits represent deposits of less than three months. Meanwhile, the role of non-bank financial services institution that actually can be a long-term funding source for development financing is still not significant. Funds that accumulate in insurance services and pension funds are still constrained by the existence of investment restrictions that may be performed. In addition, the contribution of capital markets in the national economy as reflected in emission ratio value of stocks, bonds and rights issues to GDP is still about 2 percent in 2003.

Preparation of crisis prevention and management mechanism through the concept of Financial Sector Safety Net Indonesia until now has not gone as expected. There has been no consensus among the relevant institutions on the implementation of regulatory and supervisory functions of an integrated financial services (through the establishment of the Financial Services Authority / OJK). Function guarantee bank deposits (through the establishment of the Deposit / DIC), will be introduced in 2005. Thus optimality new operation will be formed a few years later.

In brief, the challenge to continue to create and consolidate economic stability is the possibility of good economic shocks from outside, among others, with the possibility of policy reversal from the advanced industrial countries of the loose monetary policy to a tighter monetary policy and rising oil prices , as well as those derived from the domestic form of the vulnerability of fiscal sustainability, yet solid state banking and other financial institutions, poor structural condition, which in turn can affect external imbalances, fiscal sustainability, and monetary stability.

B. TARGET

The achievement of macroeconomic stability by continuing to support the achievement of high economic growth and quality and increased capability of development funding, both from government and private sources.

C. POLICY DIRECTION

Economic stability is maintained through synergistic implementation of monetary policy and prudent fiscal policy implementation that lead to fiscal sustainability (fiscal sustainability) with still providing room for increased economic activity. Economic stability will be supported by structural reforms in various fields and increasing resilience by strengthening the financial sector and financial services regulation, protection of public funds, and increased coordination of the various financial authorities through the financial system safety net in stages.

FISCAL POLICY

In fiscal policy aimed at:
1. Striking a balance between the increase in budget allocations to the efforts to strengthen fiscal sustainability through: (i) increase in state revenue for the state to raise spending, but still allows a gradual reduction in the budget deficit, (ii) formulate financing the budget deficit so as to avoid crowding out private sector financing;
2. Increased state revenues mainly pursued through policy reform and tax administration and customs;
3. Increased effectiveness and efficiency of state expenditures primarily pursued through:
(A) a clear separation of authority between central and local government, followed by allocation of a greater balance funds to the regions;
(B) refine the allocation of state budget with the reallocation of expenditure to be more focused and targeted, among others, by eliminating untargeted subsidy gradually.
4. Improved management of foreign loans which directed the government to reduce the stock of foreign debt relative to GDP is not only but also in absolute terms, about U.S. $ 1-2 billion per year. Meanwhile, for loans in the country, pursued remains a sufficient space in the private sector through the net drawdown of less than 1 percent of GDP. Thus, the ratio of debt stock per GDP is estimated to decline to about <40 percent of GDP.