burhanuddin abdullah : monetary and banking in indonesia - developments and challenges ahead speech by mr burhanuddin abdullah, governor of bank indonesia, to the financial club, jakarta, 21 august 2003. * * * excellencies members of indonesian council of world affairs distinguished guests, colleagues and friends, good afternoon, and assalamua ’ alamualaikum wr wb. it is both a pleasure and an honor for me to be here today to speak before distinguished audience. let me first thank you for inviting me, to share with you some of my thought regarding our current situation that could probably shape our future. if one ponders on our world today and tries to look back for a while to not too distant past, one may find himself in a bewildering circumstances. it seems that the past is to starkly different than that of today and that has no relevance with the present, let alone the future that we know nothing of. our very existence at the present is in danger of detachment from our historical root of yesterday. and, yet, we know the passage of time is a continuous events that whatever the dynamic of transition in human endeavour, there is always element of continuity. what is the element of continuity of the economy in transition like the one in our country? does this element of continuity need to be preserved as such that whatever the social dynamics, it has to be maintained at all cost? time is the element of continuity for the evolutionary process of nature and macroeconomic stability, in my view, is the element of continuity for the indonesian economy in transition. the stability is so important that whatever the cost to maintain it, we are ready to pay for it. it is so important simply because we can not imagine what the economy can do without. macroeconomic stability is the “ word ” of the day and macroeconomic stability is a regular preaching of central bankers. as a person who has been in the central bank for years, and so get used to the phrase “ monetary stability ” and / or “ macroeconomic stability ” that some time questioning the real meaning of these very words. especially if we look around and see many of our fellow countryman are out of job and many more becoming parasites of our social web. should we forego some degree of stability in return for employment opening or should we stick to it, and let the other authorities take care of employment issue. the mandate that was given to bank indonesia by its constitution is precisely “ the maintenance of our

inflation faces a number of problems. since the economy and financial sector are undergoing restructuring, excess liquidity emerges but circulates within the financial markets only, creating a structural breakdown between the real sector and financial system. this problem of excess liquidity, together with market segmentation amongst banks, has put greater risks on exchange rate volatility and difficulties in monetary management. in the condition of excess liquidity in banking sector and non - functioning intermediation, monetary policy is working just like “ chasing our own tail ”. banks put their excess liquidity in central bank bills ( sbis ) and in return bi has to pay interest on sbis which means pumping in the liquidity in the banking sector. in the banking sector, one of the main challenges is to recover the intermediation function. in this regards, bank indonesia has created the conducive environment by maintaining monetary stability thus providing room for lowering interest rates, thereby delivering positive signals regarding the economic recovery. the positive climate is also an opportunity for the banking sector to re - build its internal condition through credit restructuring and strengthening its capital structure. these will encourage an expansion of bank credits. a decline in interest rates has given businessmen some reason for optimism in the prospects for recovery. lower interest rates also provided an opportunity for the corporate sector to restructure its financial condition. in the face of limited bank financing, these conditions have provided wider room for reputable corporations to find alternative financing through bond issuance, both domestic and abroad. the indonesian financial sector is challenged by seemingly possible countermeasure if the anti money laundering act does not conform to the financial action task force ( fatf ) requirements. we believe that the amendment on the anti money laundering act is an important part in the efforts to maintain confidence in international financial transaction and trade and simultaneously improve good corporate governance especially by increasing transparency of banking transaction. in this regard, bank indonesia and indonesian financial transaction reports and analysis centre ( ppatk ) has been working closely with parliament to pass the amendment. other issue that needs to be addressed is related with our decision to end the imf program by the end of 2003. the real issues is not to continue or to stop the imf program, but more on how we can cover the potential financial gap and credibility gap that might be stemmed from the decision. in addressing the financial gap issue, a number of financing alternatives that have been intensively discussed. however, to find the solution for the potential credibility gap, i must