BUKIDNON STATE UNIVERSITY

Malaybalay City

College of Business – Business Administration Division

Monetary Policy of Indonesia

Facts of Indonesia:
Currency: Indonesian rupiah; IDR (ISO
4217)
Headquarters: Central Jakarta, Indonesia
Central bank of: Indonesia
Founder: People's Consultative
Assembly
Founded: 1 July 1953
Governor: Perry Warjiyo
Land Area: 1,904,569 square kilometres (735,358 square miles), 14th largest by land area and
the 7th largest in combined sea and land area
Population: 269,440,366 3:11 pm 1/10/2019
Form of State: Unitary State - governed as a single power in which the central government is
ultimately supreme and any administrative divisions (sub-national units) exercise only the
powers that the central government chooses to delegate.
Form of Government: Constitutional Republic
Here are 25 facts that you might not know about Indonesia

Fact 1)
Jakarta’s Gelora Bung Karno Stadium is one of the largest stadium in the world. When it was
completed in 1962 to host the Asian Games it’s original capacity was 120,800 people, which
would have made it the second largest today.
Fact 2)
The Komodo dragon, found in Indonesia, is the largest lizard in the world, growing up to 3
meters (9.8 feet) in length.
Fact 3)
The world’s largest flower, Rafflesia Arnoldi, weighs up to 7 kg (15 pounds) and only grows on
the island of Sumatra, Indonesia. Its petals grow to 0.5 meters (1.6 feet) long and 2.5 cm (1 inch)
thick.
Fact 4)
According to the 2004 Global Corruption Report, former Indonesian President Suharto was the
most corrupt leader of all time, embezzling between 15 billion and 35 billion USD.
Fact 5)
Indonesia has the largest ‘young’ population in the world with 165 million people under the age
of 30, whereas only 8% of the population is aged over 60 years (National Bureau of Statistics,
August 2001).
Fact 6)
Indonesia has the second longest coastline in the world (over 54,000km), after Canada (CIA
World Factbook).
Fact 7)
Indonesia has the largest Muslim population in the world.
Fact 8)
Indonesia is the largest archipelago in the world with more than 18,000 islands.
Fact 9)
Indonesia was once home to ‘Dolly’, the largest red-light district in Southeast Asia, housing up
to 2,000 sex workers in one centralised location. It was shut down in June 2014.
Fact 10)
Indonesia is the 4th largest country in the world, with a population of around 250 million (World
Bank, 2013).
Fact 11)
The Grasberg mine, located near Puncak Jaya, is the largest gold mine and the third largest
copper mine in the world.
Fact 12)
Lake Toba is the largest volcanic lake in the world. The lake’s supervolcanic eruption that
occurred 70,000 years ago was the largest known explosive eruption on Earth in the last 25
million years. According to the Toba catastrophe theory, it killed most humans living at that
time.
Fact 13)
Borobudur temple in Central Java is the largest Buddhist temple in the world, decorated with
2,672 relief panels and 504 Buddha statues.
Fact 14)
The second, third, and sixth largest Islands in the world consist of parts of Indonesia. Guinea (the
entire island, including West Papua and Papua New guinea) is the second largest. Borneo,
(across the island, including Brunei and Malaysia Sarawak) is the third largest. The island of
Sumatra is the sixth largest and is located entirely in Indonesia. (UN System-Wide Earthwatch,
1998).
Fact 15)
The most odorous flower on Earth, Amorphophallus titanum, is found in Indonesia and can grow
to an average height of two meters. When it blooms, it releases a foul odour comparable to rotten
meat, which can be smelled from half a mile away. Also known as the “devil’s tongue”, it was
originally discovered in 1878 in the rainforest of central Sumatra island, by the Italian botanist
and explorer Dr Oroardo Beccari.
Fact 16)
One of the longest snakes ever found was discovered in Sulawesi, Indonesia in 1912. According
to the Guinness World Records, the snake had a length of 10 meters (or about 32 ft 9.5 in).
Fact 17)
Jakarta is the 13th largest city in the world with a population of around 11.3 million people
(BPS, 2010).
Fact 18)
That the highest number of deaths as a result of a natural disaster was the December 2004
Tsunami which predominantly affected Aceh, Indonesia. The total death toll was estimated at
230,000 people.
Fact 19)
Indonesia, under the name Dutch East Indies, was the first Asian team to participate in the FIFA
World Cup. They qualified in 1938, but lost 6-0 against Hungary, in Reims, France.
Fact 20)
Indonesia and Monaco have the same flag but Indonesia’s is slightly wider.
Fact 21)
Java is the world’s most populous island, with a 2014 population of around 139 million people.
Fact 22)
The 1883 eruption of Krakatoa was one of the deadliest and most destructive volcanic events in
recorded history, with 36,417 deaths being attributed to the eruption itself and the tsunamis it
created. Significant additional effects were also felt around the world.
Fact 23)
In 2005, Indomie broke the Guinness Book of World Records category for “The Largest Packet
of Instant Noodles”, creating a packet that was 3.4m x 2.355m x 0.47m, with a net weight of
664.938 kg, which is about 8,000 times the weight of a regular pack of instant noodles. It was
made using the same ingredients as a regular pack of instant noodle and was certified fit for
human consumption
act 24)
After first launching ‘Palapa’ in July 1976, Indonesia became the first developing country to
operate their own domestic satellite system.
Fact 25)
The composer of the Singaporean National Anthem was Zubir Said, originally from the
highlands of West Sumatra.

Monetary Policy Objectives

The goal of Bank Indonesia is to achieve and maintain the stability of the rupiah. This goal is
stipulated in article 7 of Act No. 3 of 2004 concerning Bank Indonesia.
Rupiah stability is defined, among others, as stability of prices for goods and services reflected in
inflation. To achieve this goal, Bank Indonesia decided in 2005 to adopt the inflation targeting
framework, in which inflation is the primary monetary policy objective, while adhering to the
free floating exchange rate system. Exchange rate stability plays a crucial role in achieving price
and financial system stability. For this reason, Bank Indonesia also operates an exchange rate
policy designed to minimise excessive rate volatility, rather than to peg the exchange rate to a
particular level.
 To carry this out, Bank Indonesia holds powers to conduct monetary policy through the
establishment of monetary targets (such as money supply or interest rates) with the primary goal
of keeping inflation at the government-prescribed level.  On the operational level, these
monetary objectives rely on the use of instruments, including open market operations on the
rupiah and forex money markets, setting the discount rate, prescribing a minimum reserve
requirement and regulating credit or financing.  Bank Indonesia may also apply monetary
controls based on Sharia Principles.

Inflation

Definition to Inflation
In simple terms, inflation is understood as a persistent, ongoing rise across a broad spectrum of
prices. An increase in prices for one or two goods alone cannot be described as inflation unless
that increase spreads to (or leads to escalating prices for) other goods. The reverse of inflation is
deflation.
The indicator commonly used to measure the level of inflation is the Consumer Price Index
(CPI). Changes in the CPI over time are indicative of price movements for packages of goods
and services consumed by the public. Since July 2008, the packages of goods and services in the
CPI basket have been based on the 2007 Cost of Living Survey conducted by the Statistics
Indonesia (BPS). Following this, BPS monitors price movements for these goods and services in
selected cities and towns each month, using information from traditional markets and modern
retail outlets on specific categories of goods and services in each location.
Other inflation indicators used in international best practice include:
Wholesale Price Index. The wholesale price for a commodity is the price of transactions taking
place between the first wholesaler and the next largest trader for large quantities on the first
market for a commodity. [More detailed explanations of the Wholesale Price Index can be found
at the Statistics Indonesia (BPS) website: http://dds.bps.go.id/eng/]
The Gross Domestic Product (GDP) Deflator illustrates the measurement of price levels for the
final goods and services produced within an economy. The GDP Deflator is derived by dividing
GDP based on nominal prices by GDP based on constant prices.
Categorisation of Inflation

The inflation measured in the CPI in Indonesia is divided into 7 expenditure categories (based on
the Classification of Individual Consumption by Purpose - COICOP). These are:

1. Food Stuffs
2. Processed Foods, Beverages and Tobacco
3. Housing
4. Clothing
5. Health
6. Education and Sports and
7. Transportation and Communications.
In addition to the COICOP classifications, BPS now publishes inflation figures based on other
classifications known as disaggregation of inflation. This disaggregation is performed by
generating an inflation indicator more illustrative of the influence of fundamentals.

In Indonesia, CPI inflation is disaggregated into:

Core Inflation, i.e. the persistent component within inflation movement, influenced by
fundamentals such as:
Supply-demand interaction
External environment: exchange rate, international commodity prices, trading partner inflation
Trader and consumer expectations of inflation.
Non-Core Inflation, i.e. the inflation component marked by volatility due to the influence of non-
fundamentals. The non-core components of inflation are:
Volatile Foods:
Inflation predominantly influenced by shocks in the food stuffs category, such as harvests,
disruptions from natural events or movements in domestic food commodity prices and
international
food commodity prices.
Administered Prices:
Inflation predominantly influenced by shocks from government-announced prices, such as for
subsidised fuels, electricity billing rates, transport fares and so on.

Inflation Determinants

Inflation arises from pressures on the supply side (cost push inflation), on the demand side
(demand pull inflation) and inflation expectations. Factors driving cost push inflation arise from
exchange rate depreciation, the impact of inflation in foreign countries and especially trading
partners, increases in administered prices1 and negative supply shocks2 brought about by natural
disasters and disruptions to distribution. Demand pull inflation is driven by high demand for
goods and services relative to supply. Within the macroeconomic context, this condition is
illustrated by real output in excess of potential output or aggregate demand beyond the capacity
of the economy.

On the other hand, the inflation expectations factor is influenced by the behaviour of the public
and economic actors in applying expected inflation figures in their economic activities. These
inflation expectations may tend to be adaptive or forward looking. Reflecting this is the price
forming behaviour at the producer and trader levels, especially in the period leading up to major
religious festivities (Eid-ul-Fitr, Christmas and New Year) and when new rulings are issued on
the regional minimum wage. Although the general availability of goods is seen as adequate to
cope with increased demand, prices of goods and services at times of religious festivities mount
beyond the levels explained by the supply-demand condition. Similarly, when new rulings are
issued on the regional minimum wage, traders also raise prices even though the wage increase
has only modest significance in fuelling increased demand.
Importance of Price Stability
Stable inflation is a prerequisite for the sustainable economic growth that will ultimately bring
benefits through improvements in public welfare. The importance of inflation control is based on
the reasoning that high, unstable inflation will have negative impact on the social and economic
condition of the people.

First, high inflation will lead to steady erosion of people's real incomes and deterioration in
living standards so that all members of society and especially the poor sink into deeper poverty.

Second, unstable inflation will create uncertainty for economic actors, affecting their ability to
make decisions. Empirical experience shows that unstable inflation will create added difficulty
for the public in their decisions regarding consumption, investment and production, which in turn
will hamper economic growth.

Third, a higher level of domestic inflation in comparison to neighbouring countries will make
domestic interest rates uncompetitive, which may lead to pressure on the rupiah exchange rate.

Inflation
The Inflation Target

The inflation target is the level of inflation that must be achieved by Bank Indonesia in
coordination with the Government. Under the Bank Indonesia Law, the inflation target is
established by the Government. In a Memorandum of Understanding between the Government
and Bank Indonesia, the inflation target is established for three year period in a Decree of the
Minister of Finance (KMK). In the KMK No.93/PMK.011/2014, the inflation targets established
by the Government for 2016, 2017 and 2018 are 4%, 4% and 3,5% with ±1% deviation.

These inflation targets are envisaged as a benchmark for business and the public in conducting
their future economic activities and in so doing bring inflation down to a low, stable level. The
Government and Bank Indonesia are steadfastly committed to achieving the established inflation
target through policy coordination that consistently tracks this target. One measure for inflation
control to bring about low, stable inflation is the shaping and guiding of public inflation
expectations towards the anchor of the established inflation target. (File Link: MoF Decree for
the 2016, 2017, 2018 inflation target)

The inflation target is published on the Bank Indonesia website and sites owned by other
government institutions, such as the Ministry of Finance, Coordinating Ministry for the Economy
and the National Development Planning Agency (Bappenas). Before Act No. 23 of 1999
concerning Bank Indonesia, the inflation target was adopted by Bank Indonesia. However, after
this law came into force, the inflation target has been established by the Government in a move
to strengthen the credibility of Bank Indonesia.

Bank Indonesia Function

STATUS AND POSITION OF BANK INDONESIA

As an Independent State Institution

A new chapter in the history of Bank Indonesia as an independent central bank was initiated
when a new Central Bank Act, the UU No. 23/1999 on Bank Indonesia, was enacted on May 17,
1999 and have which has been amended with UU No.3/2004 on January 15, 2004. The Act
confers it the status and position as an independent state institution and freedom from
interference by the Government or any other external parties.
As an independent state institution, Bank Indonesia is fully autonomous in formulating and
implementing each of its task and authority as stipulated in the Act. External parties are strictly
prohibited from interfering with Bank Indonesia's implementation of its tasks, and Bank
Indonesia has the duty to refuse or disregard any attempt of interference in any form by any
party.

Such unique status and position are necessary so that Bank Indonesia can implement its role and
function as monetary authority more effectively and efficiently.

As a Legal Entity

Whether as a public legal entity or as civil legal entity, the position of Bank Indonesia is
regulated by the statutes. As a public legal entity, Bank Indonesia has the authority to issue
policy rules and regulations, which are binding to the public - at - large. As a civil legal entity,
Bank Indonesia is able to represent itself in and outside the court of law.
Vision
To become a central bank that creates tangible contribution to the Indonesian national economy
and be the best central bank amongst emerging market countries.

Mission

To achieve and maintain Rupiah stability through effective monetary policy and Bank Indonesia
policy mix;
To maintain financial system stability through effective macroprudential policy in synergy with
microprudential policy by the Financial Services Authority (OJK);
To develop digital economy and finance through strengthening Bank Indonesia payment system
policy in synergy with the government and other strategic partners policies;
To support macroeconomic stability and sustainable economic growth through achieving synergy
among Bank Indonesia’s policy mix, Government’s fiscal policies and structural reforms as well
as other strategic partners policies;
To strengthen the effectiveness of Bank Indonesia policy and economic financing, including
infrastructure, through the acceleration of financial market deepening.
To develop Islamic economy and finance at the national level and the regional level; and
To strengthen the international role, organisation, human resources, governance and information
system of Bank Indonesia.

Strategic Values
Bank Indonesia’s strategic values are: (i) trust and integrity; (ii) professionalism; (iii) excellence;
(iv) public interest; and (v) coordination and teamwork, based on the nobility of religious values.
OBJECTIVES AND TASKS OF BANK INDONESIA

Single Objective

In its capacity as central bank, Bank Indonesia has one single objective of achieving and
maintaining stability of the Rupiah value. The stability of the value of the Rupiah comprises two
aspects, one is stability of Rupiah value against goods and services and the other is the stability
of the exchange rate of the Rupiah against other currencies. The first aspect is as reflected by the
rate of inflation and the second aspect is as reflected by the development of Rupiah exchange
rate against other currencies.

The prescribed single objective is intended to establish a target that is clear and to be achieved by
Bank Indonesia within its limits and responsibilities. Thus way, the achievement of the objective
of Bank Indonesia will be easily measurable.

The Three Main Pillars

In the pursuit of the objective, Bank Indonesia is supported by three pillars, representing its three
sectors of task. These three sectors (see image below) have to be integrated to ensure that the
objective of achieving and maintaining a stable value of Rupiah can be achieved effectively and
efficiently.
 THE BOARD OF GOVERNORS
 

Appointment and Dismissal of Board of Governors

In implementing its duties and responsibilities, Bank Indonesia is managed by the Board of
Governors. The Board is led by a Governor who is assisted by a Senior Deputy Governor as the
Vice-Governor, and at least four and not more than seven Deputy Governors. The Members of
the Board of Governors shall be appointed for a term of office of 5 (five) years and may be
reappointed to the same position for no more than 1 (one) subsequent term of office.

The Governor, Senior Deputy Governor, and Deputy Governors shall be proposed and appointed
by the President with the approval of the House of Representatives. Candidates for Deputy
Governor shall be proposed by the President pursuant to a recommendation of the Governor
(vide Article 41 Act No.3, year 2004 amandment to Act No.23, year 1999). A member of the
Board of Governors may not be dismissed during his or her term of office, unless the person are
resigns, convicted of a felony, unable to attend in person for a period of 3 (three) consecutive
months without reasonable cause, is declared bankrupt or unable to settle liabilities to creditors,
or is permanently incapacitated.

  

:: Board of Governors Profile

 
Perry Warjiyo 
Governor

Mirza Adityaswara 
Senior Deputy Governor

Erwin Rijanto 
Deputy Governor

Sugeng 
Deputy Governor

Rosmaya Hadi 
Deputy Governor

Dody Budi Waluyo 

Deputy Governor