Warehouse receipts boost farmers’ clout Mohammad Nuryazidi  ;   An analyst in Bank Indonesia Banten representative office

JAKARTA POST, 11 April 2014

                                      

                                                                                         

                                                             

The Central Statistics Agency (BPS) announced relatively low inflation in the month of March, which stood at 0.08 percent, down from 0.26 percent recorded in the previous month due to supply disruptions. Food was the only group of commodities that experienced deflation with a rate of 0.44 percent. The deflation was influenced by harvests in various regions. At first glance, the figures show an encouraging indicator. But if we look more deeply, the abundant supply following the harvest will spark problems. When supply is plentiful, the price of a commodity will fall. When the harvest is over and the planting season arrives, the price surges because supply is limited. For farmers, lower rice prices at harvest will hurt. Only if they can hold on to the commodity longer can they sell it at a better price. It is already common knowledge that farmers’ bargaining power is weak. They rarely enjoy the increases in the price of the commodity they produce. In fact, they often fall victim to the price hikes because they have sold their products at the time of harvest. This illustrates farmers’ unfavorable stock management. Problems in stock management are not easy to deal with. It is not just a matter of organizing supplies, but also related to farmers’ financial needs. From the time of the production process, planting and maintenance until harvest time, farmers need cash to feed their children and cover their school tuition, which consistently increase due to inflation. Farmers, living in rural areas, have little access to easy and inexpensive financing. When they ask for bank loans, they are constrained by collateral. Warehouse receipts are an alternative solution to increase the bargaining power of farmers. Warehouse receipts are documentary proof of ownership of the goods stored in a registered warehouse specifically issued by the warehouse manager. In Indonesia, in accordance with the Trade Ministry Regulation No. 26/M-DAG/PER/6/2007, there are eight agricultural commodities that can be stored in warehouses within the administration of the warehouse receipt system. Those commodities are unhusked rice, rice, coffee, cocoa, pepper, rubber, seaweed and corn. Although complicated, warehouse receipts can even be traded, sold, exchanged, or can be used for delivery of goods in derivative transactions such as futures contracts. But typically in Indonesia warehouse receipts are used as collateral to get bank loans. The use of warehouse receipts as collateral has multiple benefits for both banks and farmers. For banks, the warehouse receipt is secured collateral. All the data related to warehouse receipts is centrally administered at the Registration Center and supervised by the Commodity Futures Trading Regulatory Board. In addition, there is quality assurance for the owner, or prospective owner, of the goods because they are stored and managed properly and the quality is tested by an independent conformity assessment board which is certified by the National Accreditation Committee and approved by the Commodity Futures Trading Regulatory Board. In addition, warehouse receipts can also be an alternative method for banks to boost lending to agriculture, which remains low. Bank Indonesia data found that agricultural credit accounted for only 5.34 percent of the total bank credit by the end of 2013. For farmers, the warehouse receipt is one means of getting fresh funds required during the growing season until the next harvest. At the time of harvest, the farmers can store their agricultural commodities in the warehouses using the warehouse receipt system. Farmers will get a receipt that can be used as collateral to obtain fresh funds from banks, which they can use to cover their daily needs while waiting for higher commodity prices. Holding the funds, the farmers have the option of holding their commodities. Farmers have the bargaining power to sell the commodity whenever they want without worrying about how to make ends meet. With adequate time, the farmers also can choose the most suitable selling price for optimum profit. Under these conditions, farmers as producers can reap benefits from the rise in the price of certain commodities. In the context of price movements, farmers’ bargaining power to control the timing of the sale of commodities will greatly impact on price stability. During the harvest, prices are not too low because the supply of goods is not too high. In the post-harvest period, the price is not too high because the supply is still there. So the price movements of agricultural commodities, which are often volatile, can be made stable. ●

Managing inflation : Food diversification Mohammad Nuryazidi  ;   A member of the Banten Regional Inflation Control Team

JAKARTA POST,  24 Maret 2014

                                      

                                                                                         

                                                      

Earlier this year, a series of natural disasters hit several provinces in Indonesia. There were flash floods in four subdistricts of Manado, Tomohon, Minahasa and North Minahasa in northern Sulawesi alone, causing severe damage to infrastructure. The damage disrupted the supply and distribution of staple goods and raised inflation pressure. Interestingly, the monthly announcement by the Central Statistics Agency (BPS) put inflation in Manado at only 1.06 percent in January (month to month). In February, Manado even experienced deflation of 0.23 percent (month to month), bringing inflation in that area to 0.83 in the first two months (year to date). Manado’s inflation rate was below the national inflation rate of 1.33 percent in the same period (year to date). Compared with other regions that also experienced heavy floods such as Banten in the western part of Java, inflation in Manado was very special. Inflation in Banten reached 2.04 percent in a two-month period (year to date). Certainly, sufficient food supplies and efficient distribution played a part in low inflation in Manado despite the floods, but there were other factors that kept inflation fairly low. Food preferences in Manado vary so it does not depend on one type of staple food. This is different from Banten, which consumes mostly rice as the main staple food. One of Manado’s staple foods is Tinutuan porridge made of pumpkin, rice, cassava, spinach, kale, corn and basil. Although the porridge contains rice, the proportion is not as much as ordinary rice porridge. The weight of food in the inflation index in Manado, according to the cost of living survey by the BPS, is relatively large at 20.61 percent. Food diversification is important not only to enhance and sustain food security but also has a significant role in maintaining price stability. The diversification of food gives more options to people so that when there is disruption or scarcity in certain types of staple foods, people can turn to other foods. The existence of these choices may reduce the demand on particular types of food commodities, thereby decreasing the risk of unreasonable price hikes. Indonesia, with a population of over 240 million, is a huge rice consumer. According to the Agriculture Ministry, Indonesia’s rice consumption was estimated at 35 million tons last year, while rice (milled) production, according to the ministry totaled 39 million tons. Even people in Papua and Nusa Tenggara who used to consume sago and corn as their main staple foods have turned to rice due to the food policy launched during the three decades of the Soeharto administration. The rice policy has changed the food consumption pattern whereby most people have shifted from a wide variety of foods such as cassava, maize and sago in the eastern region of the country to rice as the main staple food. Now the government has again encouraged local residents on various islands to return to their old staple foods, because the heavy dependence on rice makes the country highly vulnerable to wide fluctuations in the supply and price of rice. A more diversified variety of staple foods consumed by the people in the various islands will prevent too heavy demand on rice and protect the country from wide rice volatility because rice imports sometimes have to be made to meet the domestic deficit, while international rice suppliers are few, such as Thailand, Vietnam and India. But food diversification programs should also be supported with adequate farm policies and input to encourage the cultivation of various food crops. The regions in Indonesia have a wealth of popular local food. Almost every province has its own cuisine based on raw materials available locally in abundant supply. Broadening food diversification is not limited to controlling inflation but also to securing food security, which is vital for social, political and economic stability. ●

Lead BI and OJK into good collaboration Mohammad Nuryazidi ;  An Analyst at the Bank Indonesia Banten representative office

                                                JAKARTA POST,  11 Februari 2014                

                                                                                                                        

                                                                                         

                                                      

The beginning of 2014 was marked by a historic moment in the Indonesian financial industry when Bank Indonesia (BI) handed over one of its functions to the Financial Services Authority (OJK). Bank regulatory and supervisory functions are now entirely the responsibility of the OJK, while the central bank focuses on macro-prudential supervision and monetary management. Interaction between macro-prudential policies, in this case represented by BI and micro-prudential policies represented by the OJK, usually complement and reinforce each other. There is an analogy used by experts that illustrates how to distinguish the role of BI and OJK: If the financial system is a forest, then its tranquility and peace are the responsibility of the central bank, while the OJK is in charge of maintaining the health and survival of animals and trees that live in the forest. A fundamental concern of macro-prudential policy is that the interconnectedness of financial institutions and markets and their common exposure to economic variables may increase the riskiness and fragility of the whole financial system in ways and to an extent that will not be dependably captured by regulatory focus on individual institutions.  The Committee on the Global Financial System (CGFS) stated there are two distinguished aims of macro-prudential policy. The first is to enhance the resilience of the financial system to economic downturn and other adverse aggregate shock.  The second is to dampen systemic risks that arise and are propagated internally in the financial system through the interconnectedness of institutions by virtue of their common exposure to shocks and the tendency of financial institutions to act in pro-cyclical ways that magnify the extremes of the financial cycle.  Prudential standards are safety standards providing a backstop of resilience both to the firm and to the system. These two aims are not mutually exclusive. They both go beyond the purpose of micro-prudential policy, which is to ensure that individual firms have sufficient capital and liquidity to absorb shock to their loan portfolio and funding. In particular, micro-prudential supervision should be supplemented with macro-prudential policies aimed at increasing the resilience of the system as a whole, calming booms and softening busts, while mitigating systemic risks resulting from fallacies of composition associated with concentration and interconnectedness in the financial system.  Indeed, strong micro-prudential supervision is essential both to ensure that macro-prudential policymakers can draw on supervisory information in risk assessment and to ensure that the macro-prudential policy stance is effectively enforced across institutions. However, tensions may arise between micro-prudential and macro-prudential perspectives, because both policies rely on similar transmission mechanisms (Vinals, 2013). Both the OJK and BI use prudential policy instruments and tools that are applied at the level of the individual firm, such as buffers (whether capital or liquidity) and balance sheet restrictions. But they can do so with different objectives. Micro-prudential policy adjusts capital based on individual institutions’ risks, while macro-prudential policy adjusts overall levels of capital based on the financial cycle and systemic relevance to guard against systemic risk build up. Even though the purpose and calibration may differ, both policies depend on capital and liquidity tools that are deployed at the level of the individual institution.  Prudential standards are, in essence, safety standards providing a backstop of resilience both to the firm and to the system.  The use of similar instruments implies largely identical transmission channels, and makes the interaction between micro-prudential and macro-prudential policies particularly strong in comparison to relations between other public policies. Several elements of the micro-prudential and macro-prudential policies admittedly show overlaps that can create confusion regarding the border line of the policies. The lack of clarity in some aspects of the policies borders has both positive and negative aspects. Positive, as it provides flexibility to adjust the solutions to local circumstances; and negative, by making the accountability for the outcome of the policies less clear.  A clear understanding of the functions of the OJK and BI can help to exploit the complementarities between the two. It will facilitate coordination and consultation between the respective authorities. Open communication, information sharing and transparency are the essential foundation for effective functioning.  Arrangements can be more or less formalized; but frequency of contact, senior-level engagement and open exchanges are prerequisites for ensuring that full information is available to all parties.  Intensive coordination between the OJK and BI can go a long way in aligning policy action, while preserving their respective primary objectives. ●

Protecting consumers via financial inclusion Mohammad Nuryazidi   ;    An Analyst in the Bank Indonesia (BI) Banten Representative Office

JAKARTA POST,  23 Januari 2014

                                                                                                                        

                                                                                         

Financial inclusion has become a very important issue in Indonesia because access to financial institutions is still low, as indicated by a World Bank survey that concluded only 20 percent of the adult population has bank accounts.  The Bank Indonesia (BI) Household Balance Sheet Survey also produced a similar finding, saying that households with savings accounts in banks or non-bank financial institutions were still at 48 percent in 2011.  A national strategy is needed to develop and coordinate a financial inclusion program with six pillars, including financial education, public finance facility, the mapping of financial information, supporting regulations, intermediary facilities and consumer protection.  The last pillar, consumer protection, is very significant since without adequate consumer protection, the benefits of financial inclusion can be lost. Unchecked market forces and policies that relax regulation in an effort to open financial markets to serve the bottom of the pyramid can result in consumers being harmed.  Harm can range from over-indebtedness due to excessively high prices and predatory lending, to a loss of savings or pledged assets when unscrupulous actors enter the market for short-term gain.  India might be one obvious example of the importance of increasing attention on the protection of consumers in the midst of strengthening efforts to increase financial inclusion. The financial inclusion program in India has been followed by aggressive micro-lending policies.  However, this program was not supported with policies to improve supervision and education to consumers. As a result, consumers have been trapped in the short term over indebtedness and it has even not been uncommon for them to commit suicide.  Consumer protection seeks to level the playing field between suppliers and consumers of financial services. When buyers and sellers come together in a transaction, information is power. Consumers of financial services, especially new customers, lack information about the financial system and financial transactions.  On the other hand, the financial service providers serving these customers try to access a great deal of information about the customer and the market, including credit histories, market assessments and analysis to inform their decisions.  Appropriate regulations should correct the balance and encourage market expansion by apportioning information disclosure at the right time. Relevant information has to be disclosed during the different stages of contractual engagement (pre-contract, during contract and post-contract). The disclosure of information in manageable portions is necessary to avoid overloading the consumer, who can then better understand his rights and obligations. The Financial Service Authority (OJK) and BI as regulators need to understand the consumer perspective to establish effective regulation and supervision regimes. Naturally, professional bank supervisors tend to hear only from the industry since they are trained to look at business problems from the perspective of financial institutions and markets.  It is important to ensure a level playing field between consumers of financial services and the institutions that provide those services. A regulatory approach should be based on an evenhanded philosophy in order to maintain a balance between protecting consumers of financial products and services with improving and ensuring the creation of fair competition.  A good competition can result in practices that go some distance to reducing the information imbalance, if the market is disciplined and provides sufficient information to customers.  Peru is a good example for reducing the information imbalance. Peruvian consumers can access cost information about financial services published daily in newspapers. When this information was first published, interest rates dropped as much as 15 percent in six months. This market discipline also facilitates financial market expansion. Consumers who demand information play an important role in ensuring transparency among financial institutions. Transparency in the market encourages institutions to compete on the basis of better products and services and lower costs. Ultimately, the availability of quality retail financial services will draw in new customers and expand the market. Last but not least, consumer education is needed to balance information between consumers and providers of financial services. New entrants to the market, with less experience using financial services, are especially in need of education about their rights and responsibilities.  Consumer education may be conducted by government agencies, consumer associations, or the industry, but most often consumer education programs are provided through public campaigns. Campaigns use the Internet, print, radio and television media, advertising, publications and training. ●