Why BI should step up engagement in TPID Dian Ediana Rae  ;   The chief of BI’s West Java-Banten regional office

JAKARTA POST, 04 September 2014

                                                                                                                       

                                                      

The term TPID, or regional inflation controlling team, has gained in popularity ever since the presidential debates of several weeks ago, when unexpectedly, Joko “Jokowi” Widodo, now the president-elect, raised the issue. This relatively new “coordinating institution” was introduced in 2008 by Bank Indonesia (BI) together with the regional governments across the country to deal with Indonesia’s inflation more effectively. Prior to the issuance of the Home Ministry decree last year ordering the establishment of TPIDs in all regions or cities, only a number of regional governments had adopted the concept, with West Java’s TPID one of the pioneers. The BI Law of 1999 effectively abolished the role of the central bank in supporting economic growth and employment. The idea of “purifying” the role of the central bank as the monetary authority was a controversial issue during the deliberation of the BI bill at the House of Representatives. This was controversial as the central banks in several developed countries such as the US Federal Reserve still had the function of promoting full employment. The new concept of the Indonesian central bank was taken originally from the Bundesbank model, the most independent central bank in the world. Many economists and politicians questioned the merits of eliminating the role of BI in promoting economic growth and employment. Germany and many other developed countries had already reached mature economic development. They managed to keep their inflation low and stable, as the supply and demand of their goods and services reached a preferred equilibrium. They have rarely experienced any supply shock in their calculated basket of goods and services. On the other hand, Indonesia’s economy has not come to that stage, and is still far from reaching equilibrium. The situation is even more serious when taking into account the massive unemployment and huge poverty levels, and Indonesia’s limited fiscal capacity due to the heavy burden of fuel subsidies. Since the enactment of the 1999 BI Law, Indonesia has still experienced volatile inflation rates. Indonesia’s annual inflation rate between 2008 and 2013 on average was around 6.07 percent, compared to 2.46-3.71 percent in Malaysia, Singapore and Thailand. With very limited fiscal space to maneuver, many experts wonder how Indonesia will deal with these problems. In the supply sides of the economy, even for basic needs such as the production of staple foods, Indonesia is still experiencing problems. Food security has still not been achieved. This condition requires a lot of affirmative action. Hence, it is only logical that managing inflation in Indonesia is very challenging.  With a single objective goal of maintaining price stability, BI faces the harsh reality of Indonesia’s economy, where the roots of inflation mainly do not come from the demand side of the economy, but mostly from supply side issues such as the production of goods, transportation, land ownership, land zoning, the high cost of logistics and inadequate energy. The situation is certainly much gloomier since the development gap in the regions is still very large, while around 80 percent of inflation originates from regional economies. These situations have cast doubt on the suitability of adopting the Bundesbank style central bank role.  The 1999 law has failed to understand and address the real problems of Indonesian inflation. But since the policy decision has already been made, BI is required to respond effectively to deal with any potential problems arising from the economic conditions. From a legal point of view, what BI does could be considered beyond its legal mandate. But we have to realize that the gap between the legal mandates and the people’s expectation has been widening due to domestic and global dynamics. Due to supply side problems and considering that the issues of availability, accessibility and affordability of goods and services are the responsibility of regional governments, solid cooperation between BI regional offices and regional governments becomes crucial to addressing the inflation problems. It is through TPIDs that all concerned parties can work together to resolve myriad and complicated problems surrounding inflation in Indonesia. BI and regional governments have valued and cherished the TPID forum as a novel invention to strengthen cooperation. This is the main reason behind the Home Ministry decree issued last year on establishing TPIDs in every province. In TPIDs, BI regional offices play an important role in several ways, among others through providing the mapping of inflation problems in the region based on periodical economic assessments and conducting research on inflation. Then, together with other TPID members, BI regional offices formulate solutions to address the inflation problems of the regions. There are also other steps that BI may take to be more progressive in boosting economic growth beyond the current central bank instruments. One of the things that BI could consider is the reintroduction of the central bank’s credit facilities, which was used before the 1999 law came into effect. Such a facility would certainly meet the current needs of Indonesia, which are not much different than bond buying or other similar facilities implemented by the central banks of developed countries. The US Federal Reserve and the European Central Bank (ECB) still maintain their roles in economic development as well as enhancing employment opportunities, so why shouldn’t BI? The draft of the amendment of the BI Law needs to consider these issues deeply. In the future, the government and the central bank may address the fundamental issues with synergy and complementary policies. There is no need to set up a China Wall between fiscal and monetary policies. What else can BI do for the benefit of the country? It is well known that BI has had a long and rich experience in dealing with the real sector through its role as a provider of program loans for many years prior to the 1999 law. The successes of many Indonesian businesses cannot be separated from BI’s leading role in boosting many economic sectors, including in dealing with the development of livestock, farming and plantations. Its leading role in the development of small and medium enterprises was also unmatched by any institution during that time. It is only natural that this rich experience should be shared with regional governments that wish to develop a certain sector of the economy. This is the reason behind the involvement of BI regional offices in regional efforts to boost the development of SMEs and agricultural products. There wouldn’t be any potential problem with its independency and its monetary role since the TPID performs the role of policy discussions and recommendations. The decision to implement the recommendations is solely in the hands of the regional governments and their institutions. We should not be deceived by any ideology that is meant to curtail our ability to move faster in our economic development. Creating a TPID is certainly a must to bring about much closer cooperation between related parties on the regional stage. Why should we disengage from the TPID when our engagement is actually needed and beneficial for the Indonesian people? ●