Monetary and Fiscal Policies in Indonesia

Heyho peeps, i’m in the mood for something brainiac, and that brainiac thingy that crossed my mind was my master study. So, here it is, my mini paper in General Business Environment in fiscal monetary section 🙂

FISCAL AND MONETARY POLICIES IN INDONESIA

KKD

The volatile price of a product in a market is becoming usual in our daily life. The price volatileness was caused by human intervention. The intervention was purposed to develop the economy to be better. The development of economy can be beneficial for the society.

In the volatile and uncertain economic condition, people tend to seek the best business that will be able to survive during that condition. In 1998, Indonesia experienced an economic crisis which caused the rise of inflation rate. Everything became expensive and non affordable for the society. Thus, the government tried to stimulate the economic growth by enacting friendly policies that would bring back the investment. Those steps taken by the government were responded enthusiastically by the business player in Indonesia. The government had intention to do such intervention in order to make the economy became dynamic again. Actually, the economic downturn was like a double-eyed knife, it could decline the company performance or it can boost the performance for the party that can see the opportunity in this condition, such as the insurance company which will be easier to sell its product.

indonesia-inflation-chart

In a micro level, it is desirable for a country to have a smooth growth inside. The smooth growth will be preferred by the investors regarded the low risk that will they bear. As we know China is a country with highest economic growth. In July 2011, the second quarter of China growth reached 9.5 percent[i].  The economic growth forced the Chinese government to conduct tight monetary policy to control inflation. This smoothing phenomenon also occurred in the company. A volatile growth which combined the great leap and great decline would definitely scare out the investor and stakeholders. The more stable the growth, the less worried the investor will be.

To control the economy, the government usually conducts the fiscal policy. One of the fiscal policies is the state budget (APBN). The arrangement of APBN was based on several factors, such as: the government project (the investor thus can see the business opportunity by seeing what kind of projects run by the government), the tax rate (especially the corporation tax), and the prediction of gasoline price. Below is the goal of conducting fiscal policy:

  • To maintain the macro-economy stability or inflation
  • To allocate government fund
  • To distribute the income

The realization of fiscal policy in Indonesia was never be the same and certain through the years. In the Old Order era, Soekarno was known with his fiscal policy related with denomination and huge amount of money print. Due to that policy, there was excessive money distributed through the society which rose the inflation into 600 percent. In the New Order era under Soeharto, Indonesia applied the balance budget method which succeed in awakening Indonesian economy. At that time, Indonesian economic performance was great and in its golden age. Unfortunately, the large amount of foreign debt proportion ruined the economic stability and even forced Soeharto to step down from his position as President in 1998.

Recently, the focus of fiscal policy is related with the gasoline price estimation and the tax rate. Tax itself is the most important income source for a country. The source of tax is different from one to other countries, for a small or newly independent country the tax income is coming from the foreign trade tax, the developing country generated tax income from the internal business inside the country, meanwhile the developed country already seek the tax income from the individual in the country.

Since corporate tax is very crucial factor in running the business, there were a lot of tax dispute related to this issue. The west-European countries like England and Germany are experiencing 40% to 60% tax in their countries. Although the economic stability in such countries like England is good, but the tremendous tax rate will make the investor and the business player there to reconsider their decision in having a business in high tax countries. In answering that matter, small and new born countries in Eastern Europe like Estonia posses zero tax rate policies. The policy was made by Estonian government to attract many investors to enter Estonia. As a new-born country which has limited resources, it is very essential for Estonia to get a lot of fund to build more infrastructures and building a stable business climate. Zero tax rate policies then stimulate other European countries to change their tax policies. The progressive rate methods then modified into flat tax rate policies. Many countries including Indonesia were also influenced by the tax-rate change wave. The tax rate competition among countries is very tight, the five percent difference only will able to bring a big impact towards the business inside the country.

Fiscal policy has many influences towards a nation economic stability. Fiscal policy in Indonesia was created based on the law (Undang-undang – UU) which has one year valid time. The policy then will be used as the guideline in Indonesian business for a year, except there is any change related to the policy. Due to the rigidness, the business players only need to pay deep attention at the announcement of fiscal policy. Meanwhile, the monetary policy in Indonesia was reflected in the SBI rate. Thus, the business players and economic analysts have no other choice but pay attention in this rate due to the independent nature possesed by Indonesian Central Bank (BI). The rise of SBI rate will trigger the rise of credit rate as well. The volatileness of monetary policy force the government to use assumption, such as the global gasoline price, SBI and credit rate, for the decision making.

Monetary policy usually used for maintain the internal and external stability which related with the domestic currency and trade balance. The focus of domestic currency stability is low inflation rate and stable exchange rate. Monetary policy has two branches: demand management and monetary targetry. The chain process from this policy was started from this following: monetary policy -> monetary system -> interest rate -> economic activity.

In 2008, Indonesian Central Bank was lowering the interest rate in order to anticipate when the condition turned into worst. Fortunately, Indonesia did not get much impact from the global economic crisis in that year. From the explanation and example above, we can simply presume that a government should pay attention profoundly related with the economic condition in Indonesia. When there is a bad sign, the government then will be able to intervene in the right time.

Source:

Sri Adiningsih powerpoint slides. (2011). Fiscal and Monetary Policies.

[i] Metro TV News. (2011). Pertumbuhan Ekonomi China 9.6 Persen. Retrieved July 20, 2011, from http://metrotvnews.com/read/newsvideo/2011/07/14/132054/Pertumbuhan-Ekonomi-China-9-6-Persen

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s