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Editorial: Fiscal-monetary coordination

The perpetual critics of President Joko “Jokowi” Widodo may lambaste him for his surprising attendance of the annual Bankers’ Dinner hosted by Bank Indonesia (BI) on Thursday as an attempt to influence the supposedly political independence of the central bank over monetary policy

The Jakarta Post
Mon, November 24, 2014

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Editorial: Fiscal-monetary coordination

T

he perpetual critics of President Joko '€œJokowi'€ Widodo may lambaste him for his surprising attendance of the annual Bankers'€™ Dinner hosted by Bank Indonesia (BI) on Thursday as an attempt to influence the supposedly political independence of the central bank over monetary policy.

After all, Jokowi is the first president to ever attend the annual Bankers'€™ Dinner, where BI usually announces the fundamentals and direction of its monetary policy and management plans for the coming year.

But we, instead, welcome Jokowi'€™s presence at the gathering as a symbolic move that showed his full appreciation of the vital importance of good coordination between the fiscal and monetary authorities in maintaining macroeconomic stability, especially now when inflationary pressures will tend to increase for at least the next two to three months after the Nov. 18 fuel-price increases.

The President didn'€™t mention anything about the money-tightening measure taken by the central bank on the same day of the fuel-price increases, which many analysts saw as over-kill.

The 25 basis-point increase in the BI benchmark rate, decided at an unscheduled BI meeting last Wednesday, the first of such policy decisions taken since August 2013, should instead be commended as a preemptive move to check inflationary expectations because this measure was immediately followed by the easing of the loan-to-deposit ratio definition to stimulate lending and investment.

By keeping the deposit facility rate (Fasbi), an influential monetary tool that acts as a benchmark for interbank market rates, steady at 5.75 percent, BI gave a strong policy signal that even though it now focuses on stability, not on economic growth, it will still accomodate economic expansion. After all, the Fasbi facility is the most important for the transmission of policy to the financial markets. This also suggests that in taming inflation expectations the central bank does not want to restrain investment-led growth.

Having said all that doesn'€™t mean that the economic situation within the next two to three months will remain smooth and without any turbulence. The road ahead would instead be rather bumpy because of the unfavorable political situation in which Jokowi must work.

Many politicians in the House of Representatives, where his supporting coalition is only in the minority, have been trying to harrass the government and mislead the public on the objectives of the series of unpopular, yet badly-needed, reforms the new government must make to strengthen the foundation of the economy. Worse still, Jokowi must also cope with division and rivalry within his own coalition of parties.

But despite the double whammy Jokowi is now confronted with, we are glad to note that most of the economic moves he has made so far are the right ones.

Even during the Bankers'€™ Dinner, Jokowi reiterated the important role of infrastructure and private investment, including investment from foreign countries. He cited China, albeit a communist country, as a good example of a country able to take great benefits from foreign investments for the best interests of its people.

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