B

ank Indonesia (BI) will have to use its monetary policy to support the growth of the country'€™s gross domestic product (GDP), because with the widening deficit in the state budget, the fiscal instrument has limited space to spur growth, a central bank senior official said.

BI Deputy Governor Perry Warjiyo said at the moment Indonesia had little room to use the fiscal instrument to propel economic growth, as with its widening deficit, the state budget had become less effective to support the economy.

In conventional economic theory, fiscal policy is responsible for growth while monetary policy is responsible for stability.

'€œHowever, the case for Indonesia is different; our limited space on the fiscal side means that BI should not focus only on stability, but also on growth,'€ Perry told economists and central bank representatives from 14 countries in Yogyakarta on Wednesday in a discussion jointly held by BI, the Finance Ministry and the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP).

At times when Indonesia'€™s economy is facing a slowdown, like at present, '€œit is the role of monetary policy to perform countercyclical policies'€ to reverse the situation, the BI deputy governor said.

The statement affirmed economists'€™ notions that, going forward, BI would turn dovish '€” a term used to describe a central bank that focuses on supporting growth rather than managing inflation '€” to respond to recent slowdown in the economy.

The central bank stated in March that it would focus on maintaining economic stability, not economic growth, this year. However, stalling global economic recovery has put downward pressure on Indonesia'€™s gross domestic product (GDP) growth, with the economy consequently relying on BI to reverse the situation. In the first quarter this year, the economy expanded by only 6.02 percent, its slowest rate in two and a half years.

Slowdown in growth means that BI, which adopts an inflation-targeting framework, has limited room to hike rates in response to the recent upward pressure on inflation.

Consumer price index (CPI) has soared above BI'€™s annual target of 5.5 percent for two consecutive months: it stood at 5.9 percent in April '€” the highest in two years '€” and 5.57 percent in March.

'€œWhen a country is facing risks in its economic growth, I think it is acceptable for a central bank to tolerate higher inflation, as a compensation for monetary stimulus to support growth,'€ said Reza Yamora Siregar, the lead economist of the ASEAN +3 Macroeconomic Research Office (AMRO).

He noted that monetary policies were especially effective when an economy needed swift resolution to address certain economic problems. '€œHere in Indonesia, fiscal policies have to face a protracted political process in the House of Representatives first, before they can be finally implemented,'€ Reza explained.

Responding to the issue, the Finance Ministry'€™s chief of fiscal agency, Bambang Brodjonegoro, acknowledged that fiscal authorities have limited space to boost the country'€™s economic growth, mainly due to burdening fuel subsidies.

'€œGoing forward, the key for us to have more ample fiscal space [to boost economic growth] is to ensure that we do not spend excessive funds in fuel subsidies, the money of which can instead be allocated for capital spending,'€ Bambang said on the sidelines of the discussion.

To curb the ballooning fuel subsidies, the government is currently mulling to hike the price of subsidized Premium gasoline by 44 percent to Rp 6,500 (67 US cents), from currently Rp 4,500, which officials claimed would save the government'€™s fiscal coffers at least Rp 30 trillion ($3.1 billion).