ESSAY Model G20 FMCBG Meeting

by : Kelly Vallycia, Venecia

The Ukrainian leader’s intention of joining NATO was the beginning of the conflict between Ukraine and Russia. The fact that Russia does not want Ukraine to join NATO makes it clear that it is opposed to this idea. NATO is quite likely to place weapons in Ukraine and bring weaponry to the Ukrainian border, posing a risk to the Russian state in the future. The conflict between Ukraine and Russia has not only affected Indonesia’s trade performance (as shown by a decrease in non-oil and gas exports, hampered wheat imports, and increased food prices) but also in advanced economies. For instance, on the European side, the shock in supply side of natural gas is unavoidable. Rising fuel costs could weaken every aspect, such as credit quality across the public power sector and majority of operating expenses which impact to prices, then trigger the inflation. This conflict is, of course, a topic of discussion in all aspects of the G20 in the main event and side event. Indonesian President and G20 chairman Joko Widodo even had met both leaders of Ukraine and Russia to advocate for peace and discuss the possibility of the solutions. The presence of both of leaders will be beneficial for most countries in the world.

Inflation, moreover, stagflation that magnifying by rising energy prices and food shortages, is one of the focuses of G20 members. Inflation in question can be associated with rising interest rates. Bank Indonesia estimates that the Fed will raise interest rates. This increase is caused by rising inflation and the impact of rising energy prices from geopolitical tensions in Russia and Ukraine so that the FRR (Fed Fund Rate) will rise even higher. This certainly has an impact on Indonesia because foreign capital flows into and out of US securities, including Indonesia. So, with the release of foreign funds will cause the Rupiah exchange rate to weaken or decrease. Then, Bank Indonesia was asked to adjust the benchmark interest rate to the Fed’s interest rate. This will certainly have an impact on the Indonesian economy. However, this is still being considered with the current condition of the BI benchmark interest rate which is still at 3.75% with a maximum of 4.5% regarding Indonesia Finance Minister. The impact of rising interest is rising cost of fund.

In addition, the impact of the war on the Middle East and North Africa experienced an increase in commodity prices. Russia is the second exporter of crude oil, the third exporter of coal, and the world’s largest exporter of wheat. This of course also has an impact on Indonesia, which soared the price of non-oil and gas commodities such as coal and crude palm oil (CPO). However, it has a positive impact on Indonesian exports. The increase in fuel is of course also the impact of the war on the energy sector. Recall that the inflation caused by the supply shock, as Russia and Ukraine are the world’s food granaries. However, this can prove that Indonesia has a strong resilience in the Indonesian agricultural sector, by receiving an award for self-sufficiency in rice that has been recognized by the Food Organization and (FAO) and the International Rice Research Institute (IRRI). There are several options for Bank Indonesia to mitigate the negative effects of Russia’s war with Ukraine, such as increased coordination with the Ministry of Finance in structural reforms and inflation management. This effort was made to keep the home economy growing regardless of the instability of the international financial markets. Additionally, Bank Indonesia has improved the implementation of three policies. Creating economic stability through monetary policy and advancing a green economy through macro prudential policy include the first.

In our opinion, Indonesian government should focus about implementation of the trilemma management. It is clearly more effective because we can analyse the pattern of changes that will affect the work performance of Bank Indonesia. Not only that, but the trilemma can also be an approach that can be used by Bank Indonesia to evaluate the performance of its policy interactions. To optimize the performance of the trilemma management itself, we can divide it into 3 strategies. First one, is to achieve price stability by maintaining monetary policy autonomy. This policy itself is countercyclical or reduces spending and then increases taxes when the economy is booming, then increases spending and then cuts tax collection during a recession. Of course, macroprudential also has instruments including the Macroprudential Intermediation Ratio (RIM), Macroprudential Liquidity Buffer (PLM), Loan to Value (LVT)/Financing to Value (FTV) Ratio, Countercyclical Capital Buffer (CCyB), Macroprudential Inclusive Financing Ratio (RPIM). Followed by, financial system stability requires payment system policies. We can start by setting interest rates so that we can manage inflation expectations in the future. Monetary policy itself is divided into 2 types, quantitative and qualitative policies. Quantitative monetary policy affects the amount of money supply which will reduce interest rates so that this can minimize the unemployment rate. Quantitative policy is carried out through several instruments, including open market operations by selling and buying Bank Indonesia certificates (SBI). Meanwhile, qualitative monetary policy has the objective of supervising the forms of loans and investments made by trading banks. The qualitative policy itself is divided into two, namely selective loan supervision and moral advice by providing consultation to banks to make allocations of funds.

Another effort is to optimize macroprudential to minimize risks in the financial sector. Next strategy is to monitor and stabilize exchange rate movements and the last strategy is to manage capital flows which have a very impact on macroeconomic stability by supporting foreign exchange reserves as a form of self-insurance or promoting foreign exchange market finances. Lastly, structural reform also one of the policy mix that talk about digital payment. The issue of digital payments, of course, has also been circulating. In this digitalization era, Bank Indonesia has made several innovations. These innovations include the Indonesian Payment System Blueprint (BSPI) 2025. BSPI 2025 is Bank Indonesia’s strategy to encourage the integration of the national digital financial economy and ensure the central bank’s function in maintaining the integrity of the money circulation process, maintaining the effectiveness of monetary policy and financial system stability, as well as supporting economic inclusion in the digital age. But on the progress of innovation, it also has some negative impacts such as shadow banking. Shadow banking is caused by inadequate supervision, so it harms financial sector stability (SSK). To overcome this risk, BSPI 2025 is present another Bank innovation is open banking where open banking aims to encourage overall digital transformation in banking and build interlinks between banks and fintech. The demand for data disclosure is not only aimed at banking, but also fintech. This is done to maintain a level playing field between banks and fintech as well as to encourage collaboration between the two to create services that are more oriented to consumer needs (consumer-centric). The Open Banking strategy was also adopted to avoid the risk of shadow banking. On the front end, Bank Indonesia focused on efforts to strengthen interoperability between payment instruments. One of the strategies adopted is to standardize the Quick Response (QR) code for payments, known as the Quick Response Code Indonesian Standard (QRIS). Meanwhile, in the middle-end and back-end, an integrated payment interface (IPT) and new infrastructure that can serve fast payment will be developed. IPT will be the main channel (single interface) that connects all payment instruments and channels (mobile interoperability).

In this essay, we know that the global economy will always have an impact on one another.

Likewise with Indonesia, apart from the Ukraine-Russia war, Indonesia has always experienced an increase in inflation. Although Bank Indonesia is able to address the inflation, it continues to affect the people of Indonesia. So, we recommend that the state strengthen its monetary policy in which Bank Indonesia increases the minimum cash or liquidity limit with the aim of reducing money circulating in the community. This is followed by what we have discussed, namely the increase in interest rates, so that many people save funds in banks and the flow of bank funds will remain smooth. The rate of inflation can certainly be minimized if selling securities to the public or open market operations. Second, in terms of fiscal policy, the government itself can minimize government spending so that falling demand can slow down the rate of inflation. We also recommend increasing tax rates for example PPnBM. This is because the middle class and above are certainly able to enrich their own country. Apart from these policies, the state can also facilitate the import or export of goods so that the number of goods in the market can increase, followed by a fixed price for certain goods.

edited by CA

References:

– https://www.liputan6.com/bisnis/read/5050725/pemerintah-proyeksi-inflasi-2022-

maksimal-48-persen-masih-aman

– https://www.kominfo.go.id/content/detail/43660/fao-dan-irri-akui-ketangguhan-sektor-

pertanian-indonesia-di-tengah-krisis/0/berita

– https://www.bi.go.id/id/publikasi/laporan/Documents/7_LPI2019_BAB5.pdf

– http://lib.ibs.ac.id/materi/BI%20Corner/Terbitan%20BI/Seri%20Kebanksentralan/BSK-25-

Bauran-Kebijakan-Perry-Warjiyo.pdf

– https://feb.ub.ac.id/policy-mix.html