BI, Govt Should Bolster Coop To Maintain Financial Stability

Jakarta, Dec 6 (Antara) - An economic analyst from EC Think has said that Bank Indonesia (BI) and the government of Indonesia should cooperate to maintain financial stability in an effort to reduce the country`s current account deficit. "The central bank and the government are obligated to harmonize their policies," analyst Aviliani said at a workshop in Cirebon, West Java, on Thursday. She said the two sides should do their respective homework so that the policies they adopt become mutually supportive. Aviliani also noted that the BI of late had been going all out to stabilize the financial system through the implementation of new monetary policies, raising its benchmark rate up to 175 basis points over the last six months. "A scenario where the government does not do anything, while the BI continues to raise its key rates should not take place," Aviliani added. She also expressed hope that the stabilization of the financial system should not be left to market mechanisms because that could hurt the country`s real-estate sector. "The weakening of the rupiah will affect the real-estate sector and economic transactions. The rupiah should have been pegged at a certain level," Aviliani pointed out. She said that BI could also coordinate with the directorate general of customs and excise for export data that could be used for increasing the volume of foreign exchange. "Data pertaining to customs and excise could be found out. So far, such data has only been obtained from banks. The cash flow must also continue to be monitored until March (before tapering of stimulus by the United States` Federal Reserve Bank)," the economist said. Bank Indonesia had said last week that it was seeking a sustainable current account deficit instead of surplus to cope with the prevailing economic conditions. A current account deficit of 0.25 to 2.5 percent of the country`s gross domestic product (GDP) was sustainable for the economy, Bank Indonesia Governor Agus Martowardojo stated. "It should not necessarily be in surplus, which could result in a hard landing" he said. Agus further revealed that the country`s current account deficit had dropped from US$9.9 billion or 4.4 percent of the GDP during the second quarter to US$8.4 billion or 3.8 percent of the GDP during the third quarter of this year. He added that hard work was needed to reduce the current account deficit and in order for Indonesia to move a step forward and be safe from falling into the middle income trap. "Indonesia has the potential to climb to the level of upper middle income with the ongoing expansion of the middle class. If we fail to respond properly, we could fall into the middle income trap and it will be too late to enter the upper level," he said. He said the current account deficit was a result of not only the trade deficit, but was also attributable to deficits in the service and income accounts, as well as oil and gas trade. Therefore, a number of policies had to be adopted, such as tax incentives for foreign companies and progressive taxes levied on motor vehicles to reduce the imports of oil, Agus said. "We have to be able to control imports, but we don`t want surplus in the current account as what we need is sustainable and good quality economic growth," he said. In addition, foreign investors had to be encouraged to build an upstream industry producing export oriented intermediate materials, Agus proposed. "We have to be prepared, especially since the global economic landscape is undergoing a change," he said. It seemed like advanced countries had made progress in pulling themselves out of the financial crisis, while developing countries, such as China and India had tended to decline, he said.