ISSN 0522-2572
Vision :
≈To be recognized, domestically and internationally,
as a credible central bank through the strength of our values and achievement of low, stable rates of inflation∆
Mission :
≈To achieve and maintain price stability by maintaining monetary stability and by promoting financial system stability for Indonesia»s long term sustainable development∆
Values :
iii
Symbols, Reporting Period, and Source of Data
Revised figures r Provisional figures * Incomplete figures ** Data are not yet available . . .
Not available √
Figures in before and after mark could not be compared x Nil or less than the last digit √ √ United States Dollar $ (dollar)
Contents
Chapter 1: Overview ... 2
Economic Developments in 2004 ... 5
Economic Challenges and Policies ... 7
Facing the Challenges ... 7
Policies Undertaken ... 8
Macroeconomic Policies ... 8
Monetary Policy ... 8
Fiscal Policy ... 8
Microeconomic Policies ... 9
Policies on Banks and Other Financial Institutions ... 9
Payment System Policies ... 10
Real Sector Policy ... 10
Initiative Measures on Foreign Debt Management and International Cooperation ... 11
Economic Prospects for 2005 ... 11
Basic Assumptions ... 12
Global Environment ... 12
Fiscal Policy ... 12
Real Sector Policies ... 13
Forecast of Economic Growth ... 13
Forecast of Indonesian Balance of Payments Condition ... 14
Forecast of the Rupiah Exchange Rate ... 14
Forecast of Inflation ... 15
Forecast of Banking Condition ... 15
Forecast of the Payment System ... 16
Policy Direction in 2005 ... 16
Monetary Policy Direction ... 16
Banking Policy Direction ... 17
Payment System Policy Direction ... 17
Risks and Uncertainties ... 18
Box : Setting Inflation Targets in Indonesia ... 19
Box : Interest Rate as an Operational Target for Monetary Policy ... 21
Chapter 2: Macroeconomic Conditions ... 24
Aggregate Demand ... 25
Aggregate Supply ... 32
v
Chapter 3: The Exchange Rate ... 39
Rupiah Exchange Rate ... 40
Foreign Exchange Transactions ... 42
Policy Responses ... 44
Ongoing Problems ... 44
Box: Development of the Rupiah Exchange Rate After Issuance of New Regulations on Net Open Positions ... 47
Chapter 4: Inflation ... 50
Evaluation on The Achievement of The 2004 Inflation Target ... 50
Inflation ... 52
CPI Inflation ... 52
Other Indicators of Inflation ... 52
Factors Affecting Inflation ... 53
Fundamental Factors ... 53
Interaction Between Aggregate Demand and Supply ... 53
External Factors ... 54
Inflation Expectations ... 55
Non-fundamental Factors (Shocks) ... 56
Foods With Volatile Prices ... 56
Government Policy on Administered Prices ... 56
Box: Impact of Fuel Price Hikes on Inflation ... 57
Box: Formation of Inflation Expectation in Indonesia ... 59
Chapter 5: Monetary Developments ... 62
Evaluation of Monetary Policy ... 63
The Accommodative Episode: January - May ... 63
The Episode of a Tight Bias Monetary Policy: June - December ... 64
Monetary Indicators ... 64
Base Money ... 64
Money Supply ... 66
Rupiah O/N Inter-bank Money Market ... 69
Deposit and Credit Interest Rates ... 69
Chapter 6: Balance of Payments ... 72
Current Account ... 74
Exports ... 74
Services ... 78
Capital Account ... 79
Official Capital Account ... 79
Private Capital Account ... 81
International Reserves ... 84
Box: The Structure of Indonesia»s Non-Oil/Gas Exports ... 85
Box: Change in the Input System for Non-Oil/Gas Export Data to an On-line System ... 87
Box: The Issuance of Government Foreign Currency Bonds in International Capital Markets ... 89
Chapter 7: Government Finance ... 92
State Revenues And Grants ... 93
Government Expenditures ... 94
Deficit Financing ... 95
Impact of Fiscal Policy to Economic, Monetary, and International Reserves ... 96
Box: State Budget»s New Format ... 98
Chapter 8: Banks and Other Financial Institutions ... 100
Banking Policy ... 100
Strengthening Banking Resilience and the Bank Recovery Program ... 101
Strengthening Implementation of Prudential Banking Principles ... 101
Development of MSME (Micro-, Small-, and Medium-Scale Enterprises) ... 102
Policies on Capital Market and Other Financial Institutions ... 103
Commercial Banks ... 104
Rural Banks ... 109
Capital Markets and Other Financial Institutions ... 109
Capital Market ... 109
Finance Companies ... 112
State-Owned Pawn Company ... 114
Box: The Undisbursed Loan Phenomenon ... 115
Box: The Indonesian Financial System Architecture ... 117
Box: Efforts in Developing MSME through the Counterpart Program ... 119
Chapter 9: Sharia Banks and Other Sharia Financial Institutions ... 122
Sharia Banks ... 122
Policy on Sharia Banking Development ... 123
Institutional Development of Sharia Banking ... 124
Sharia Banking Performance ... 125
vii
Cooperation with International and Domestic Institutions ... 128
Cooperation with International Institutions ... 128
Cooperation with Domestic Institutions ... 129
Sharia Capital Market ... 129
Sharia Shares ... 129
Sharia Bonds ... 130
Sharia Mutual Funds ... 131
Sharia Insurance ... 132
Chapter 10: National Payment System ... 136
Payment System Policy ... 136
Cash Payment System ... 136
Fulfillment of Currency Needs ... 136
Enhancement of Currency Quality ... 137
Tackling Counterfeiting Money ... 137
Regulation of the Cash Payment System ... 137
Policy on Non-cash Payment System ... 138
Payment System Risk and the BI-RTGS System ... 138
Scheme to Overcome Failure to Settle ... 139
Regulations on the Card-Based Payment Instruments (APMK) ... 139
Supervision of the Payment System ... 140
Development of the National Clearing System (SKN) ... 140
Enhancement of the National Black List (DHN) ... 140
Payment Instruments ... 141
Cash Payment Instruments ... 141
Currency in Circulation (UYD) ... 141
Currency Procurement and Cash Position ... 141
Destruction of ≈No-Longer-Fit-for-Circulation∆ Currency ... 141
Development of Cash Inflows and Outflows ... 142
Counterfeit Money ... 142
Non-Cash Payment Instruments ... 143
Development of RTGS Transactions ... 143
Development of Clearing Transactions ... 145
Development of Card-Based Payment Instruments ... 146
Chapter 11: The World Economy and International Cooperation ... 148
The World Economy ... 148
Economic Developments in Europe ... 150
Economic Developments in Japan ... 151
Economic Developments in Asia-Pacific, Outside Japan ... 151
Economic Developments in Latin America ... 152
Financial Markets ... 152
Commodity Markets ... 154
The Oil Market ... 154
The Non-Oil Commodities Market ... 155
International Cooperation ... 156
Enhanced Role of Developing Countries ... 156
Doha Development Agenda ... 156
G-20 Accord for Sustained Growth ... 156
Asian Economic and Financial Integration ... 157
Roadmap to ASEAN Financial Integration ... 157
Regional Surveillance and the Chiang Mai Initiative ... 158
Development of the Asian Bond Market ... 158
Liberalization of Regional/Bilateral Trade ... 159
Box: Global Imbalances and Their Implications ... 161
Box: The East Asia Monetary and Financial Architecture ... 164
Chapter 12: Economic Prospects and Policy Directions 2005 ... 168
Several Basic Assumptions ... 170
The Global Environment ... 170
Fiscal Policy ... 172
Real Sector Policies ... 173
Prospects For The Indonesian Economy ... 174
Aggregate Demand Prospects ... 174
Private Consumption ... 175
Government Consumption ... 175
Investment ... 176
Exports and Imports of Goods and Services ... 179
Aggregate Supply Prospects ... 180
Balance of Payments Prospects ... 182
Exchange Rate Prospects ... 183
Inflation Prospects ... 185
Prospects for Inflation in 2005 ... 185
Prospects for Inflation in 2006 ... 188
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PaymentSystemProspects ... 189
PolicyDirection ... 189
MonetaryPolicyDirection ... 189
BankingPolicyDirection ... 190
PaymentSystemPolicyDirection ... 192
RisksandUncertainties ... 193
Box:The2004?2009NationalMedium-TermDevelopmentPlan ... 195
Box:ImpactofTsunamiNaturalDisasteronNationalEconomy ... 197
Appendices ... 200
A HeadOffice,RepresentativeOffices,BranchOffices ... 201
B BoardofGovernorsofBankIndonesiaAsofDecember31,2004 ... 202
C.1 OrganizationandHumanResources ... 203
C.2 OrganizationChartofBankIndonesia ... 207
D.1 BankIndonesiaBalanceSheets ... 213
D.2 BankIndonesiaSurplusDeficitStatement ... 214
E.1 ListofBankIndonesiaRegulationsin2004 ... 215
E.2 BankIndonesiaCircularLetters(Extern)in2004 ... 222
E.3 VariousImportantRegulationsandPoliciesinEconomicandFinanceAreasin2004 ... 227
F. StatisticTables... 233
G. BanknotesSpecimenIssuedin2004 ... 282
Table 1.1 Selected Macroeconomic Indicators ... 3
Table 2.1 GDP Growth by Expenditures ... 25
Table 2.2 Saving - Investment Gap ... 29
Table 2.3 Investment Climate Survey ... 30
Table 2.4 World Bank»s Doing Business Project Survey ... 30
Table 2.5 Sectoral GDP Growth ... 32
Table 4.1 Evaluation of Inflation Projection ... 51
Table 4.2 Contributions of CPI Inflation Components ... 53
Table 4.3 Impact of Several Administered Price Policies on Inflation ... 56
Table 5.1. Base Money ... 65
Table 5.2. Money Supply and Its Affecting Factors ... 67
Table 6.1 Indonesia»s Balance of Payments ... 72
Table 6.2 Development of External Vulnerability Indicators ... 73
Table 6.3 Development of Exports ... 74
Table 6.4 Selected Non-oil/Gas Export Commodities ... 74
Table 6.5 Development of Imports ... 77
Table 6.6 Selected Non-oil/Gas Import Commodities ... 77
Table 6.7 Balance of Trade ... 78
Table 6.8 Foreign Debt Outstanding ... 80
Table 6.9 Sensitivity of Government Foreign Debt to Exchange Rate Changes ... 81
Table 6.10 Foreign Capital Invesment Realization ... 82
Table 6.11 Foreign Debt Position By Maturity ... 83
Table 7.1 Summary of Government Financial Operation ... 93
Table 7.2 Assumption and Realizations of State Budget Main Indicators ... 94
Table 7.3 Estimated Government Expenditures by Classification in GDP (current price) ... 97
Table 8.1 Number of Banks and Bank Offices ... 105
Table 8.2 Commercial Bank Performance Indicators ... 105
Table 8.3 Development of Third-Party Funds ... 106
Table 8.4 Bank Credits ... 107
Tables and Charts
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Table 8.5 Micro-, Small-, Medium-Scale Enterprises Credit ... 108
Table 8.6 Rural Banks Business Activities ... 109
Table 8.7 Rural Bank Credits ... 109
Table 8.8 Position of SUN Ownership ... 111
Table 8.9 Performance of Finance Companies ... 112
Table 8.10 Consumer Financing by Type of Goods ... 113
Table 8.11 Sources and Usage of Funds of Finance Companies ... 113
Table 8.12 Earning Assets Quality of Finance Companies ... 113
Table 8.13 State-Owned Pawn Company»s Business ... 114
Table 9.1 Sharia Banking Institutions ... 124
Table 9.2 Development of Sharia Banking Financing ... 126
Table 9.3 Issuance of Sharia Bonds ... 131
Table 9.4 Issuance of Sharia Medium-Term Marketable Securities ... 131
Table 9.5 Issuance of Sharia Mutual Funds ... 132
Table 9.6 Sharia Insurance Companies ... 133
Table 10.1 Currency in Circulation Position ... 141
Table 10.2 Flow of Fund»s Profile in BI-RTGS ... 144
Table 11.1 Major Economic Indicators ... 149
Table 11.2 External Financing of Developing Countries ... 153
Table 11.3 Selected Currencies» Exchange Rate Againts US Dollar, 2004 ... 154
Table 12.1 Projections of Several World Economic Indicators ... 170
Table 12.2 Projections of Developing Countries» External Financing ... 172
Table 12.3 Basic Assumptions of 2005 State Budget ... 172
Table 12.4 2005 State Budget ... 173
Table 12.5 Estimated GDP Growth by Expenditures ... 174
Table 12.6 Comparison of Investment Climates within The Region ... 174
Table 12.7 Government 100-Days Programs To Step Up Investment ... 175
Table 12.8 Indication of Demand for Infrastructure Fund from Selected State-Owned Companies (2005-2009) ... 176
Table 12.9 Annual Infrastructure Financing Requirement ... 179
Table 12.10 Projects Offered at Infrastructure Summit - Stage I ... 179
Table 12.11 Sectoral GDP Growth Estimation ... 180
Table 12.12 Forecast Foodstuff Production in 2005 ... 181
Table 12.13 The 2005 Infrastructure Projects ... 181
Chart 2.1 Growth Contribution to GDP ... 25
Chart 2.2 Retail Sales Index ... 25
Chart 2.3 Consumers Confidence Index ... 25
Chart 2.4 Disposable Income ... 26
Chart 2.5 Consumption Credits ... 26
Chart 2.6 Shares of Food and Non-Food Consumptions ... 26
Chart 2.7 Apartment and Housing Rental/Sales Prices ... 26
Chart 2.8 Motor-Vehicle Sales ... 27
Chart 2.9 Government Consumption Expenditure ... 27
Chart 2.10 Interrelation among Consumption, Utilization, and Investment ... 27
Chart 2.11 Investment Growth ... 27
Chart 2.12 Business Fixed Investment ... 28
Chart 2.13 Truck Sales ... 28
Chart 2.14 Incremental Capital-Output Ratio (ICOR) ... 29
Chart 2.15 Volume of Oil and Gas Exports ... 31
Chart 2.16 Exports Volume by Sector ... 31
Chart 2.17 Exports Volume of Industrial Output ... 31
Chart 2.18 Investment Growth and Capital Goods Imports ... 31
Chart 2.19 Volume of Raw Material and Capital Goods Imports ... 32
Chart 2.20 Capacity Utilization ... 32
Chart 2.21 Growth of Property Credit ... 33
Chart 2.22 Number of Airplane Passangers ... 34
Chart 2.23 Number of Telephone Customers ... 34
Chart 2.24 Development of Foreign Visitors ... 34
Chart 2.25 Electricity Consumption ... 35
Chart 2.26 Poverty Level ... 35
Chart 2.27 Labor Force By Economic Sector ... 36
Chart 2.28 Labor Force and Unemployment ... 36
Chart 2.29 Education Levels of Unemployed People ... 36
Chart 2.30 Labor Force Productivity ... 37
Chart 2.31 Number of Laid Off Workers ... 37
Chart 2.32 Number of Workers from Formal and Informal Sectors ... 37
Chart 3.1 Volatility of Rupiah Exchange Rate ... 40
Chart 3.2 Average Exchange Rate (Monthly ) ... 40
Chart 3.3 Real Effective Exchange Rate ... 40
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Chart 3.5 US Federal Reserve Monetary Policy Cycle ... 41
Chart 3.6 Foreign Currency Purchases by Corporations ... 41
Chart 3.7 Bandwagon Effect ... 42
Chart 3.8 Differences in Interest Rates ... 42
Chart 3.9 Foreign Currency Transactions ... 43
Chart 3.10 Composition of Foreign Currency Transactions ... 43
Chart 3.11 Share of Bank Group»s Spot Transactions ... 43
Chart 3.12 Share of Bank Group»s Swap Transactions ... 43
Chart 3.13 Deficit in Export-Import Flow of Funds ... 45
Chart 3.14 Net Demand/Supply Foreign Currency from Domestic and Offshore ... 45
Chart 3.15 Foreign Capital Investment in Rupiah Money Market Instruments ... 46
Chart 3.16 Foreign Swap Selling and Rupiah Exchange Rate ... 46
Chart 4.1 Annual and Monthly CPI inflation ... 52
Chart 4.2 Inflation by Category of Goods ... 52
Chart 4.3 Wholesale Price Index Inflation ... 52
Chart 4.4 GDP Deflator Inflation ... 53
Chart 4.5 CPI Disaggregation ... 53
Chart 4.6 Inflation and Real M1 Growth ... 54
Chart 4.7 Composite Inflation of Trade Partner Countries and Domestic Inflation ... 55
Chart 4.8 Inflation and Exchange Rate ... 55
Chart 4.9 Traded and Non-Traded Inflation ... 55
Chart 4.10 Consumer Price Expectation ... 55
Chart 4.11 Traders Price Expectation ... 56
Chart 5.1 Development of Interest Rates in Monetary Instruments ... 63
Chart 5.2 Base Money Growth ... 64
Chart 5.3 Changes of SBI and FASBI Outstandings ... 65
Chart 5.4 Development of Extremely Liquid Bank Excess Liquidity ... 66
Chart 5.5 Development of Bank Excess Liquidity (Open Market Operation/Third-Party Funds) ... 66
Chart 5.6 Growth of Real M1 and M2 ... 67
Chart 5.7 Development of C/D and M2 Multiplier ... 67
Chart 5.8 Shares of Savings and Time Deposits ... 68
Chart 5.9 Shares of Time Deposits Based on Maturity ... 68
Chart 5.10 Development of O/N Interbank Money Market ... 69
Chart 5.11 Net Lender and Borrower in Rupiah O/N Interbank Money Market ... 69
Chart 5.12 Development of Interest Rates ... 70
Chart 6.1 Coffee Price at New York Bourse ... 75
Chart 6.2 Share of Non-Oil/Gas Exports Based On Destination Country ... 75
Chart 6.3 Growth of Major Trade Partner Countries» Imports ... 76
Chart 6.4 Share of Imports from Indonesia in Major Trade Partner Countries» Imports ... 76
Chart 6.5 Share of Non-Oil/Gas Imports Based on Country of Origin ... 78
Chart 6.6 Indonesia»s Balance of Payments with ASEAN and Major Trade Partner Countries ... 78
Chart 6.7 Realized Withdrawals on CGI Loans ... 80
Chart 6.8 Credit Ratings by Standard and Poors ... 82
Chart 6.9 Indicators of Foreign Debt Burden ... 83
Chart 6.10 Foreign Currency Reserve Position ... 84
Chart 7.1 Government Finance Operation ... 92
Chart 7.2 Ratio of Government Debt and Primary Balance ... 94
Chart 7.3 Shares of Non-Oil/Gas Taxes to GDP and Total State Revenue ... 94
Chart 7.4 Fuel Subsidy ... 95
Chart 7.5 Indicators of Fiscal Sustainability and Deficit Financing From Domestic Banking Sectors ... 96
Chart 7.6 Indicator of Fiscal Impulse ... 97
Chart 7.7 Rupiah Impact of Government Finance Operation ... 97
Chart 7.8 Forex Impact of Government Financial Operation ... 97
Chart 8.1 Third-Party Funds, Credits and LDR ... 105
Chart 8.2 Composition of Earning Assets ... 106
Chart 8.3 Share of Credit to GDP ... 107
Chart 8.4 Non Performing Loans ... 107
Chart 8.5 Composite Index and Net Foreign Buying ... 110
Chart 8.6 Selective Stock Market Index ... 110
Chart 8.7 Foreign Ownership in Government Shares and Bonds ... 110
Chart 8.8 Issuances of Shares (IPOs/Right Issue) ... 110
Chart 8.9 Government Bonds Buy-Sell Activities... 111
Chart 8.10 Corporate Bond Transaction ... 111
Chart 8.11 Issuances of Bonds ... 111
Chart 8.12 Growth of Mutual Funds NAV ... 112
Chart 8.13 Performance of State-Owned Pawn Corporation ... 114
Chart 9.1 Sharia Banking Business Activities ... 125
Chart 9.2 Share of Sharia Banking in National Banking Sector ... 125
Chart 9.3 Sharia Banking Funds Accummulation ... 125
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Chart 9.5 Sharia Banking NPF ... 127
Chart 9.6 Sharia Banking CAR, BUS, and ROA ... 127
Chart 9.7 SWBI and Sharia Interbank Money Market Volume ... 128
Chart 9.8 JII Index ... 130
Chart 9.9 JII Market Capitalization ... 130
Chart 9.10 Issuances of Sharia Bonds and MTNs ... 132
Chart 9.11 Shares of Sharia Bonds and MTNs to Total Corporate Bonds ... 132
Chart 10.1 Development of Cash Position ... 141
Chart 10.2 Number of Inflows and Outflows ... 142
Chart 10.3 Monthly BI-RTGS Transactions ... 143
Chart 10.4 Percentage of Successful Settlements of RTGS Transactions ... 143
Chart 10.5 BI-RTGS Transactions Based on Origin of Instructions ... 143
Chart 10.6 RTGS Transactions Based on Time ... 144
Chart 10.7 Clearing Delivery on National Basis ... 144
Chart 10.8 Nominal Value of Clearing Delivery Based on Region ... 145
Chart 10.9 Volume of Clearing Delivery Based on Region ... 145
Chart 10.10 Development of Intercity Clearing ... 145
Chart 10.11 Credit Card, Debit Card, and ATM Transactions ... 145
Chart 10.12 Monthly Card-Based Transactions ... 146
Chart 10.13 Number of ATMs ... 146
Chart 11.1 Share Price Index in Advanced Countries ... 152
Chart 11.2 Share Price Index in Selected Asian Countries ... 153
Chart 11.3 LIBOR Interest Rate for 1-Month Maturity ... 153
Chart 11.4 LIBOR Interest Rate for 6-Month Maturity ... 154
Chart 11.5 Oil Commodity Price Index ... 155
Chart 11.6 Agriculture Commodity Price Index ... 155
Chart 11.7 Manufacturing Commodity Price Index ... 155
Chart 11.8 Mining Commodity Price Index ... 155
Chart 12.1 Consumers Confidence Index in Advanced Countries ... 170
Chart 12.2 Consumers Confidence Index in Some Developing Countries ... 171
Chart 12.3 Leading Indicator Index of Advanced Countries ... 171
Chart 12.4 Leading Indicator Index of Asian Countries ... 171
Chart 12.5 Disposable Income and Private Consumption ... 176
Chart 12.6 Consumers Confidence Index ... 176
Chart 12.8 Expectation of Business Situation ... 177
Chart 12.9 Business Expectation by Sectors ... 177
Chart 12.10 Capital Goods Imports ... 177
Chart 12.11 Growth of Investment Credit and Investment Credit Interest Rate ... 178
Chart 12.12 Share of Credits in GDP ... 178
Chart 12.13 Indonesia»s Infrastructure Financing (% of GDP) ... 178
Chart 12.14 World Trade Volume and Export Volume ... 180
Chart 12.15 Real Effective Exchange Rate (REER) ... 180
Chart 12.16 Balance of Payments Forecast for 2005 ... 184
Chart 12.17 Inflation Expectation - Retail Sales Survey ... 185
Chart 12.18 Inflation Expectation - Consumers Survey ... 185
Chart 12.19 Consumption Plan for the next 6-month ... 186
Chart 12.20 Income Expectation for the next 6-month ... 186
Chart 12.21 Import of Raw Materials and Capital Goods ... 186
Chart 12.22 Rice Production and Forecast for 2005 ... 186
Chart 12.23 Rupiah Exchange Rate and Inflation ... 187
Chart 12.24 Trading Partners Inflation ... 187
Chart 12.25 Leading Indicator of Inflation ... 187
Diagram 12.1 Infrastructure Financing Requirement ... 178
xviii
Viewed from the perspective of Bank Indonesia, 2004 was a year marked by many striking successes,
but also beset with continuing challenges and hardships. On the political front, 2004 witnessed the best
aspects of orderly political transitionƒthe national general elections proceeded in an extremely democratic
manner, with peace, fairness and equality. The process of social re-building accelerated, making an
atmosphere of peace and security more deeply entrenched as part of public life. This was also a year of
continued macroeconomic stability, which laid a solid foundation for stronger growth. This is particularly
the case with investment rebounding to provide a more balanced structure of growth. In addition, 2004
was a year in which we re-discovered our identity as a nation in pursuit of self-reliance. We proved that
many of our problems can be managedƒindeed, in some cases even solved through solutions and programs
that are home-grown.
On the basis of various indicators of macroeconomic conditions in 2004, we ought to be greatly
encouraged by our progress. Various efforts made by the Government and Bank Indonesia to control financial
conditions have produced the expected results. Inflation was contained to 6.4% during 2004, which is
within the inflation target range of 5.5% + 1%. During the same period, 1- and 3-month SBIs dropped by
88 basis points and 105 basis points, respectively. The rupiah exchange rate was maintained at level conducive
to growth, despite downward pressures for a time near mid-year. These improved macroeconomic and
monetary conditions had the anticipated result, which is to say, they nurtured a more conducive climate for
the real economy. This is reflected in the continued gradual rise in economic growth to around 5% in 2004.
In the banking sector, continued macroeconomic stability and the gathering momentum of economic
growth have boosted the banking industry during the last few years. Credit extensions, which are the main
activity of the banking industry, continue their gradual recovery. An even more encouraging result was the
impressive pickup in investment credits, which had lagged the rest of the economy since the 1997/98 crisis.
From a micro perspective, the national banking industry registered some impressive achievements in
2004. Most notably, the ongoing internal consolidation and bank restructuring programs continued to
make progress. This was reflected in a stronger capital structure, declining credit risk and rising bank
profitability. Bank capital stood at a safe and relatively stable level, of 20% in 2004. For their part,
non-performing credits remained at quite low, as reflected by net and gross non-non-performing loan (NPL) ratios of
2.1% and 6.7%, respectively. This performance helped to improve bank profitability. The banking industry
was even recorded as one of the sectors with high return.
Notwithstanding improvements in abovementioned various economic indicators, several problems
and challenges remain. Economic growth remained too low to absorb adequate numbers of the nation»s
labor force, leaving unemployment too high. Neither has growth been sufficient to raise per capita income
back to its pre-crisis level. Another acute problem concerns the growing fiscal burden brought on by high
world oil prices. Moreover, several deep structural problems have not been fully resolved, including an
unbalanced economic structure resulting from a sub-standard investment climate; low international
competitiveness; incomplete corporate restructuring; financial sector inefficiency; and poor infrastructure.
In the banking sector, the on-going challenge is to re-build the most basic element of banking
business, which is public confidence. To this end, certain obstacles need to be overcome before banking
credibility can be fully restored . For example, the dominance of banks» short-term funding, which causes
them to concentrate on short-term credits. Also, there is limited information on debtors; a low asset-liability
management capacity, including operational risk; and heightened competition from non-bank products,
such as mutual funds, bonds and insurance.
Entering 2005, these various problems and challenges need to be tackled jointly by Bank Indonesia
and the other relevant authorities. For us at Bank Indonesia, our most important contribution concerns the
maintenance of monetary stability, which is an unquestionable prerequisite; it is vital and it will remain so.
To this end, in 2005, Bank Indonesia is to implement monetary policy with a tight bias in order to achieve
the inflation target set by the Government. This policy is undertaken along a path of gradually declining
inflation, with the medium-term goal of reducing inflation to a rate that is similar to that of other countries
in the region. In implementation, Bank Indonesia would continue to take into consideration the main factors
influencing inflation, namely the output gap, the exchange rate and inflationary expectations. In order to
clarify our signals and directions √√and to enhance the effectiveness of monetary policy√√ starting
mid-2005, Bank Indonesia will shift to interest rates as the operational instrument for achieving the inflation
target.
In the banking area, policies have been formulated to deal with the likely dynamics of the national
banking industry. This policy mainly encompasses acceleration of consolidation in the banking industry;
reorientation of national banking industry»s in directions consistent with the banking blue print;
implementation of steps to strengthen financial infrastructures, including prudential regulation; enhancing
