Not enough to just curb inflation, says Indonesia's former central bank chief

In a new book on his time in office, titled “A Central Bank Must be Down-to-Earth”, Mr Darmin, who headed Bank Indonesia from Sept 2010 to May 2013, says the central bank must shape policies that matter to the bulk of the population - which in In
In a new book on his time in office, titled “A Central Bank Must be Down-to-Earth”, Mr Darmin, who headed Bank Indonesia from Sept 2010 to May 2013, says the central bank must shape policies that matter to the bulk of the population - which in Indonesia’s case would be its farmers, fishermen, as well as small traders – instead of policies that only benefit the haves. -- ST PHOTO: Wahyudi Soeriaatmadja

With food prices staying high in recent weeks, Indonesia’s central bank has been installing computer screens in traditional markets for buyers and sellers to check standard market prices and deter sellers propping up prices.

Former Bank Indonesia governor Darmin Nasution says such price transparency is important to help keep inflation in check, and help producers decide on wholesale prices.

But Mr Darmin firmly believes that it is not enough for the central bank to just curb inflation. It has to play a more active role in shaping the structure of the economy, he argues.

Bank Indonesia (BI) must therefore shape policies that matter to the bulk of the population - which in Indonesia’s case would be its farmers, fishermen, as well as small traders – instead of policies that only benefit the haves.

In a new book on his time in office, titled “A Central Bank Must be Down-to-Earth”, Mr Darmin, who headed BI from Sept 2010 to May 2013, recounts how he introduced a breakthrough regulation in late 2012 requiring banks to have at least 20 per cent of their lending in micro financing and small business loans.

He calls such policymaking “the third policymaking branch” that the central bank and government must take a role in, on top of conventional monetary and fiscal policies.

Mr Darmin calls this “structural policy”, and loosely defines it as measures targeted at the grassroots and real market players to make the economy run efficiently.

He points out that Indonesia boasts more than 55 million small to medium enterprises which employ more than 101 million people.

Yet, he argues, the robust economic growth of recent years has not really benefited them, leaving them handcuffed to a prolonged condition of a lack of skills, market access and bank financing.

Commercial banks here have favoured lending to established corporations, applying much higher lending rates for small businesses.

“A nation cannot have an advanced economy if its loan to gross domestic product ratio is around 31 percent,” Mr Darmin writes, referring to Indonesia’s ratio, compared with those of Malaysia and Thailand that have reached 110 per cent.

“But we should not only aim for high loan growth, as we also have to grow the number of people who are bankable. Loan growth must be inclusive,” he adds.

Mr Darmin’s book was completed just before Indonesia suffered a record current account deficit and capital outflows that exerted pressure on the rupiah.

But it serves as a wake-up call.

As he puts it, the robust growth of South-east Asia’s largest economy in recent years – at over 6 per cent – was not supported by growth in domestic industries and manufacturing to produce enough basic materials and consumer goods to match rising domestic demand.

As a result, a spike in imports, coupled with stagnant exports on the back of a slowing global economy, was a recipe for a ballooning current account deficit.

In the run up to this year, this gap was conveniently filled with inflows of portfolio and fixed-asset investments seeking refuge from crises in the US and Europe.

Yet commodity prices also fell - Indonesia is the world's largest palm oil producer and a main thermal coal exporter - weakening the value of the country's exports at a time when strong economic growth translated to spikes in purchases of consumer goods from cars to computers.The buffer of fund inflows did not last long.

“Indonesia’s manufacturing sector does not yet have adequate capacity to meet the need of processing raw materials, as well as for infrastructure projects such as sea ports, roads and power plants,” Mr Darmin writes.

If Indonesia is to prevent a repeat of its current woes, it needs to develop its industries in a concerted manner, Mr Darmin suggests.

And it can start with incentives and funds to help its small and medium industries grow.

“Mr Darmin was not a populist central bank governor as he might have seemed to be. He did encourage economic growth with acomodative policies, but he always held on to the central bank’s norms: to maintain stability and macroeconomic balances,” says Mr Junanto Herdiawan, a BI economist who helped to edit Mr Darmin’s book. wahyudis@sph.com.sg