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- Strengthening Fiscal and Monetary Collaboration to Maintain Economic Stability
Posted by : Ridwan Sobirin Sunday, June 1, 2014
Although in the fourth quarter of 2013 showed an improvement in some of Indonesia’s economic indicators, the prospect of the archipelago’s economy in the forthcoming years will still continue to face some challenges that should not be taken lightly. Some of these challenges are very diverse including cyclical, structural, domestic, and global challenge . Nowadays, the world economy is likely to face a declining trend, particularly driven by the decline in economic growth of emerging countries as well as China's economic structural reform . This is also followed by a decline in global commodity prices that have a direct impact on the decline in Indonesia's commodity exports which in turn increases the pressure on this country’s current account and currency.
Meanwhile, our reliance on imports is getting bigger as the result of limited domestic production capabilities amid growing domestic demand. Lower export competitiveness further increases the pressure on the current account deficit and the value of the rupiah as well. Another negative effect to worry about regarding this condition is an increase in inflation, particularly imported inflation. In addition, the lack of infrastructure and commodities trading system also contributes to increasing inflationary pressures.
Bank Indonesia, as the monetary authority, has set some targets of various macroeconomic indicators for the 2014 period including economic growth (5.2% - 6.2%) and inflation (4.5±1%). In order to achieve these targets, Bank Indonesia certainly could not do it alone since the policy response of the instrument tends to be less effective and expensive if not involving another related authority. Therefore, Bank Indonesia and the government as the authorities of the two main policies in the economy must increase the intensity of coordination by taking various policy mixes to respond to these challenges in order to control economic stability and maintain economic balance.
The increasing of policy coordination intensity between Bank Indonesia and the Government might include some efforts to synergize various sectors under their respective authorities, among others, inflation pressure, strengthening the resilience of the external sector and real sector, and improve the effectiveness of crisis prevention and management together with LPS (Indonesia Deposit Insurance Corporation) and OJK (Indonesia Financial Service Authority).
Bank Indonesia might take measures to stabilize inflation and current account deficit through monetary policy mix. In addition to interest rate policy, Bank Indonesia can also optimize various other policies such as exchange rate and macroprudential policy as a new sector after OJK (Indonesia Financial Service Authority) was built so that the objectives can be achieved optimally. In relation to the government, inflation control is also supported by coordination with the Government to control inflation through Inflation Control Team (TPI) involving both state and local governments so that the inflation target can be achieved. This TPI program is really plays a strategic role in controlling inflation since it cooperates with the Government.
Meanwhile, the Government might seek to strengthen the resilience of the external and real sector through its fiscal policy and some policies in some strategic sectors such as energy, agribusiness, and infrastructure. The objective of those policies should be focused on specific objectives, for example, suppressing the current account deficit (By reducing fuel subsidies and tax instruments), promoting economic growth, and accelerating investment.
Another thing that needs to be synergized is handling the economic crisis because it is very important for the Indonesian economy. By creating good and trusted crisis management protocol, we would gain good reputation from investors to keep our economy attractive. In this case, the policy coordination involves not only the BI and the Government alone but also could be strengthened by coordinating with OJK and LPS.
Then at the end, if the policy coordination between the Bank and the Government continues to strengthen and improve, then in the short, medium, and long term it can restore economic stability and push towards a more healthy and balanced economy.
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