Indonesian Policy Makers Must Be Proactive as Growth Accelerates, IMF Says

Bank Indonesia should signal a greater readiness to boost borrowing costs amid signs of acceleration in the economy, the third-strongest among Group of 20 nations last year, the International Monetary Fund said. 

“I think they’ll need to be more proactive going forward on monetary policy,” Thomas Rumbaugh, division chief at the IMF’s Asia & Pacific Department, said in a conference call today. “We believe there needs to be a stronger commitment to reducing inflation and keeping it low.” 

Rumbaugh’s comments come almost two weeks after Indonesia’s newly appointed central bank chief, Governor Darmin Nasution, said he wants to avoid increasing interest rates by using lending and reserve rules for banks to contain inflation and stoke an expansion in Southeast Asia’s largest economy. Gross domestic product growth will accelerate to 6.2 percent next year from 6 percent this year and 4.5 percent in 2009, the IMF said. 

Unlike policy makers in other parts of the region, including India, Malaysia, Thailand, South Korea, New Zealand and Australia, Bank Indonesia has kept its benchmark rate unchanged at a record-low 6.5 percent for more than a year. The rupiah has climbed 4.5 percent against the U.S. dollar this year, less than the ringgit, baht and Singapore dollar. It was little changed at 8,985 per dollar at 9:35 a.m. in Jakarta today. 

President Susilo Bambang Yudhoyono aims to bolster growth, and is targeting an average 6.6 percent annual expansion through the end of his term in 2014. 

Nasution’s View

“As long as we still can manage our monetary variables by other instruments, we will try to avoid changing the interest rate,” Governor Nasution, who took up his post this month, said in an interview in Jakarta on Sept. 6. 

The central bank said this month that lenders will be required to set aside 8 percent of their deposits as primary reserves starting Nov. 1, from 5 percent previously. 

“They may be able to delay a rate increase a little bit longer because of the step they’ve taken on the reserve requirement,” Rumbaugh said. Still, “the direction is clear, and they’re going to have to be proactive in terms of watching market developments.”

Rumbaugh also said capital inflows, as well as stronger credit growth, are “providing a boost to domestic liquidity.” 

Lending rose 10 percent in 2009 and has accelerated to a 19.5 percent pace in the year to July, the IMF said in its so- called Article IV assessment of Indonesia’s economy.

Inflation Pressure

The IMF urged the central bank to “signal its readiness to respond to rising inflationary pressures to anchor inflation expectations within the 4 percent to 6 percent target range.”

Consumer prices are forecast to rise 5.9 percent this year, after gaining 2.8 percent in 2009, the fund said. 

“A proactive policy would also signal Bank Indonesia’s commitment to lower the level and volatility of inflation in line with trading partners,” the fund said. The IMF also “generally cautioned against introducing administrative measures to fuel credit growth.” 

While the fund described as “impressive” the performance of Indonesia’s authorities in guiding the economy through the global financial crisis, including being the only G-20 member with declining government debt in 2009, further fiscal reforms will be “necessary to support sustained high growth.” 

“Specifically, reducing energy subsidies would create additional fiscal space for much needed infrastructure spending and transfer programs for the poor, with little impact on debt sustainability,” the IMF said. 

“Over the medium term, efforts should continue to improve public infrastructure and the business climate,” the fund said. 

Today’s report also “commended” the nation’s moves over the last decade to boost financial stability, as well as recent measures such as the enactment of the Financial System Safety Net Law.Source: Bloomberg