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Worries on current-account deficit
Besides focusing on controlling inflation within its target corridor, Bank Indonesiaâs (BI) monetary policy direction in 2014 will continue to concentrate on bringing the current-account deficit to a healthier level through its interest rate policy and exchange rate stabilization according to economic fundamentals
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esides focusing on controlling inflation within its target corridor, Bank Indonesia's (BI) monetary policy direction in 2014 will continue to concentrate on bringing the current-account deficit to a healthier level through its interest rate policy and exchange rate stabilization according to economic fundamentals.
While Indonesia's inflation has been on a downward trend toward its target, the current-account deficit has been quite volatile. Higher inflation will erode people's buying power, which will also hamper economic growth.
How about the current-account deficit? Why is it important to decrease the country's existing level of deficit? What do we know is wrong if we have a current-account deficit?
Based on the view taken by the International Monetary Fund (IMF), a current-account deficit is defined as the difference between the value of a country's goods and services exports and the value of its goods and services imports.
A deficit in a country's current account means, therefore, that a country is importing more goods and services than it is exporting.
The current account also includes net income (such as dividends and interest) and net current transfers from abroad (such as foreign aid), but they usually make up just a small part of the total.
A current account can also be defined as the difference between national (both private and public) savings and investment. A deficit may reflect a low level of national savings relative to investment or a high rate of investment ' or both.
A deficit potentially incentivizes faster output growth and economic development, although current research does not show that developing countries with current-account deficits grow faster.
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There have been no significant developments in research-and-development-based export commodities.
In 2013, Indonesia's current-account deficit touched US$28.34 billion, which was 3.25 percent of its gross domestic product (GDP). This amount was worse than that in 2012, when the deficit reached $24.42 billion or 2.78 percent of GDP.
In 2014, BI expects an improvement in the current account performance, bringing it back to below 3 percent of GDP.
Then why do we have to lower the level of the current-account deficit in 2014? An increasing
current-account deficit can affect Indonesia's foreign exchange rate, so the country will have a higher demand for foreign currencies to settle its import liabilities.
Of course, this will put pressure on the rupiah and weaken its value. It means that Indonesia will need to pay more for its imports. Besides that, imports account for more than a quarter of Indonesia's GDP, so a failure to pay for imports may affect the economy, and a very high current-account deficit increases the risk of non-payment.
The higher deficit in 2013 was primarily caused by a lower surplus in the trade balance, where a reduction in exports is larger than a drop in imports. Even though it was still surplus, our import growth was higher than our export growth. This may be an indication of problems with competitiveness.
However, since the current-account deficit also means an excess of investment over savings, then it can be said that we have a highly productive, growing economy. Therefore, as Indonesia is still growing, a deficit is not such a bad thing.
But still, in the long term, we have to ensure that our current-account deficit does not persist. In order to achieve a lower level of current-account deficit, or even a surplus, we have to boost our exports or decrease our imports, or both.
In terms of the exchange rate, BI needs to maintain the rupiah's competitiveness.
The government's contributions are also important. Right now some measures have been taken, including the export restrictions on unprocessed minerals, which were introduced in January this year.
This was made to reduce mineral ore exports and eventually boost value-added commodity exports.
The structure of Indonesia's exports, which are dominated by raw commodities and labor-intensive products with low added value, have resulted in our exports being less competitive than those from elsewhere in the region.
The share of our high-value-added commodity exports has decreased from year to year, and yet there have been no significant developments in research-and-development-based export commodities.
In fact, countries with a solid surplus in their current accounts, such as China, Malaysia, Singapore and South Korea, have the
capability to export high-value-added goods. They are able to export goods with high innovation and research and development, so the added value generated is much larger than the export of raw and processed minerals.
For now, it seems that shrinking our current-account deficit is not really important because, as was mentioned above, Indonesia is still in the process of evolving.
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The writer is an economist at Bank Indonesia.
