Fiscal-Monetary Synergy Can Reduce Global Risk

The global economy is continuing to slow while one-third of the world's economy is expected to experience negative growth. But Indonesia is projected to continue to enjoy economic growth of 5 percent next year.

KOMPAS/AGUS SUSANTO

Lights turn on at night in a multi-storey building in the Kuningan area, South Jakarta, Sunday (31/7/2022). Amidst the threat of imminent global recession, Indonesia is projected to continue to enjoy economic growth of 5% next year..

WASHINGTON DC, KOMPAS — Amidst the threat of imminent global recession, Indonesia is projected to continue to enjoy economic growth of 5 percent next year. Synergy between fiscal and monetary policies is the key to protecting the Indonesian economy from global economic risks.

“We are grateful there is good synergy between the government's fiscal policy and Bank Indonesia's monetary policy, while still respecting their mutual independence. This is one of the differences with other countries and the key to Indonesia's economic resilience from global economic risks," Bank Indonesia (BI) Governor Perry Warjiyo said in Washington, D.C. on Wednesday evening local time, or on Thursday (13/10) in Western Indonesia Time.

Perry was in the United States capital with Finance Minister Sri Mulyani Indrawati to chair the Fourth G20 Finance Ministers and Central Bank Governors Meeting as part of Indonesia’s G20 Presidency on Thursday afternoon, Eastern Daylight Time (EDT). Perry said that one implementation of the fiscal-monetary synergy was when Indonesia tried to contain inflation that was increasing due to a surge in global oil prices. The government was able to restrict the increase in the domestic price of fuel oil (BBM) by providing subsidies.

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The fuel subsidy helped keep inflation under control and prevent its sharp increase, like it had in other countries. Since inflation was under control, the central bank, as the monetary authority, did not need to immediately raise its benchmark interest rate like the central banks of other countries had. The policy to maintain the interest rate helped keep the country’s economic recovery on track.

Prior to raising fuel prices in early September 2022, the government and BI took other measures to keep inflation under control and maintain the recovery momentum.

“The [government’s] move to provide fuel subsidies supported the monetary authority in controlling inflation. On the other hand, the monetary authority also provided support, such as by absorbing government bonds so the government had sufficient funds to provide the fuel subsidies. This is a form of synergy and burden sharing between the fiscal and monetary [authorities]," said Perry.

KOMPAS/BAHANA PATRIA GUPTA

A queue of export container trucks containing aluminum products produced by Maspion in Sidoarjo, East Java, Thursday (29/9/2022).The global economy is continuing to slow, while one-third of the world's economy is expected to experience negative growth and recession this year and next.

No synergy

According to Perry, many countries had not adopted a policy stance on fiscal-monetary synergy like Indonesia had to face the global economic turmoil. As a result, when world crude oil prices soared, these countries also saw a sharp increase in their inflation.

To curb inflation, the central banks of many countries immediately raised their benchmark interest rate, which ultimately hampered economic growth. As a consequence, a number of countries saw a faster decline in economic growth than usual.

Meanwhile, Finance Minister Sri Mulyani said that in addition to fiscal-monetary synergy, the government also carried out structural reform to encourage economic growth, including an industrial downstreaming program and improvements to the investment climate in order to attract more foreign direct investment.

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> Inflation Set to Soar

Thanks to synergy and structural reform, Indonesia was able to maintain high economic growth amidst the threat of a global recession, with the IMF projecting Indonesia's economy to grow at 5 percent in 2023.

In fact, the global economy is continuing to slow, while one-third of the world's economy is expected to experience negative growth and recession this year and next.

IMF chief economist Pierre Olivier Gourinchas also underlined that monetary tightening should be carried out with good planning and coordination. Otherwise, monetary tightening could be excessive and thus lead to an avoidable recession.

This would also harm other countries by triggering capital flight.

This article was translated by Hendarsyah Tarmizi.