2010 Economic Report on Indonesia - Bank Sentral Republik Indonesia
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September 18, 2019

EXECUTIVE SUMMARY

Strengthening National Economy Amid A Multi-Speed Global Economic Recovery

Domestic economic performance improved during 2010 amid a multi speed global economic recovery. This was reflected by robust GDP growth, a large balance of payments surplus and improved financial sector performance. Underpinned by such strong fundamentals and positive perceptions concerning the Indonesian economy, the rupiah exchange rate strengthened with low volatility. In terms of prices, up to the middle of 2010 infltion was well controlled. However, the intensity of supplyside disruptions during the second half of the reporting year, in particular food items, heightened inflationary pressures that pushed inflation above its target.

Despite improved economic performance, the domestic economy remained facing a number of key challenges that consists of massive foreign capital inflows, excess liquidity in banking system, rising inflation as well as several problems in the banking sector and impediments in the real sector. These challenges left Bank Indonesia facing a trilemma, namely maintaining price stability, exchange rate stability and financial system stability. Therefore, relying on merely one policy instrument was insufficient, and a policy mix was required. In 2010 Bank Indonesia instituted a policy mix to ensure internal and external stability. The mix of instruments used for internal stability aimed at stabilising prices and managing domestic demand, while external stability aimed at the management of foreign capital inflows and exchange rate stability. Referring to interest rate policy, in 2010 Bank Indonesia held its BI Rate at a level of 6.5%. Meanwhile, in addition to the interest rate policy, in the middle of 2010 Bank Indonesia issued macroprudential policy for managing domestic liquidity and the surge in foreign capital inflows. This policy mix was further supported by other policies to maintain financial system stability as well as government policies.

Looking ahead, Indonesian economic performance is predicted to continue improving. In 2011, economic growth is expected to increase, the balance of payments surplus will remain large, the bank intermediation function will improve and inflation will remain within its target corridor. In the medium term, the domestic economy is projected to continue expanding and accompanied by further decrease in inflation. Bank Indonesia will remain directing its policies towards macroeconomic and financial system stability to support sustainable economic growth. Monetary policy will continue aiming to achieve the inflation target, while banking policy is directed to enhance bank resilience in order to boost bank performance and competitiveness as well as to withstand crisis shocks. Payment system policy is directed to create a more effi cient, reliable, simple and secure payment system.

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