1958-59 Bank Indonesia Annual Report.Pdf

B A N K I N D O N E S I A REPORT FOR THE YEAR 1958-1959 * G. KOLFF & Co. INDONESIA R E P O R T OF THE GOVERNOR OF BANK INDONESIA FOR THE FINANCIAL YEAR 1958 - 1959 ii B A N K I N D O N E S I A Head Office: DJAKARTA Branch Office: AMSTERDAM Representatives: LONDON NEW YORK Agencies: AMBON, AMPENAN, BANDJARMASIN, BANDUNG, DJEMBER, JOGJAKARTA, KEDIRI, MAKASAR, MALANG, MEDAN, MENADO, PADANG, PALEMBANG, PONTIANAK, SEMARANG, SOLO, SURABAJA, TJIREBON. Report of the Governor I. GENERAL REVIEW Inflation, the always threatening danger to economic development both in highly developed and in underdeveloped countries, in so-called capitalistic as well as in socialist countries, grew rampant in Indonesia during the report year 1958/ l959. The volume of money circulation increased from Rp 18.9 billion at the end of 1957 and Rp 19.6 billion per March 31, 1958 to Rp 29.3 billion at the end of 1958 and about Rp 29.9 billion per March 31, l959. The above figures show a rise by 50%. This meant an increase of purchasing power by the same proportion which, employed to the full, was bound to generate rising prices, unless it would have been possible to increase production, stock of goods and services by 50%. Obviously this could not be realized in Indonesia as it would have been impossi- ble anywhere, because inflation generally rises at a faster rate than production can be stepped up, in the end even hampering production. On account of heavy pressures on the balance of payments, increasing stocks of goods and/or services through imports could not be done either. Without restrictions on imports the excessive purchasing power would have caused foreign exchange reserves to be consumed entirely, which would have been unjustifiable. The level of prices in Indonesia showed an undeniably rising trend. Index numbers (June l953 = 100) of prices of 12 foodstuffs in villages in Djawa and Madura rose from 267 per December 1957 to 282 at the end of 1958, while index numbers (Djakarta 1953 — 100) of 19 foodstuffs in some cities showed the following developments: Djakarta Palembang Makassar 1957 December 244 243 212 1958 March 275 256 238 June 229 303 212 September 277 383 232 December 287 367 262 1 Prices of foodstuffs increased in the villages as well as in the cities, but as can be understood, in cities where food has to be “imported” prices rose to a greater extent than in the production centres, i.e. in the countryside. At this stage I would like to limit the subject on prices to those of foodstuffs. In another part of this general review I shall return to this subject in another connection. The developments in the index numbers for foodstuffs illustrate sufficiently the effects of the expanding volume of money in circulation on prices in Indonesia. The monetary analysis as given elsewhere in this annual report explains the causes of inflation which is encumbering Indonesia’s economy. There is no deny- ing that the Government was the largest source of the increased volume of money in circulation in 1958. The public sector and the sector of international trade increased the money volume by Rp 10,858 million and Rp 1,214 million respec- tively. Against these increases in money volume stood a deflationary amount of Rp 850 million from private enterprises and Rp 135 million from other sectors (capital, etc.). Conclusively, the increase of money in circulation amounted to Rp 10,453 million of which the public sector indeed formed the greatest source, by creating money to the amount of Rp 10,858 million. Inflation may originate from various sources, e.g. from developments in the business cycle or from economic development in general. In the latter case the Government can generate increases in the volume of money in circulation by its expenditures on development projects. The private sector too may cause inflation in relation with the business cycle, in which case bank credits will increase excep- tionally in connection with activities in the private sector to reach higher levels of production. In 1958 the private sector appeared to have increased the money volume by Rp 731 million, while in 1957 it caused a decrease in the money supply by Rp 423 million. The private sector eventually caused a deflationary effect by Rp 850 million, as prepayments by importers decreased the money supply by Rp 1,562 million. As it is clear that the private sector did not cause inflation in relation with the business cycle, the conclusion may be drawn that the Government was the source 2 of the excessive money supply, but not in connection with expenditures on development projects. This means that the inflation in Indonesia should not be attrib- uted to the business cycle. The inflation we are confronted with now is originating from the large expenditures of the Government, but not in regard of economic conditions, but in view of the task of the Government to restore peace and order in Indonesia after the disturbances by the rebellion in the beginning of 1957. Re- gions which had been occupied by the rebels were brought under the authority of the Government and organized resistance from the insurgents was broken by the Armed Forces. There remains only unorganized resistance which the Government must put an end to, in order to restore security throughout the Republic of Indone- sia. The discharge of this task, which is laid upon the Armed Forces has to be financed and causes Government expenditure to rise beyond proportions, generat- ing the current inflation. Exclusive of expenditure in the security field the deficit on the 1958 budget was estimated at Rp 2.4 billion. Eventually the deficit was estimated at about Rp 10 billion including Rp 4 billion earmarked to restore security. Realization of the 1958 budget showed a deficit to the amount of Rp 12 billion. It is self-evident that the Government could not finance the large expenditures in a non-inflationary manner, e.g. by loans or an increase of taxes, but was impelled to borrow on short term from the Central Bank, i.e. Bank Indonesia. Net Government debt with Bank Indonesia increased by Rp 5,372 million in 1957 and by Rp 8,780 million in 1958. In the year under report Indonesia was not only confronted with inflation as mentioned above but its economy was also affected by other factors. Economic activity in large parts of the world with which Indonesia maintains important trade relations was slackening. As discussed elsewhere in this annual report, economic activity in the United States moved into a recession, so that its Gross National Product in 1958 decreased by 3%. The recession in Western Eu- 3 rope, though not to such an extent as to reduce the Gross National Product as much as in the United States, caused industrial production to rise by only 1.5%. As I have brought to the fore several times, a rise in the level of the business cycle does not always need to be followed by an increase in prices for raw materials, the more so at a time when economic activity is slowing down. Trade relations with industrial countries basically exist of selling the natural produce of Indonesia and purchasing industrial goods. Recession generally reduces the demand for raw materials due to slackening industrial activity. Though the volume of exports could possibly be maintained or even raised, the export value is bound to decrease as a result of falling prices of raw materials. Thus export proceeds will fall, which does not always need to be accompa- nied by reduced prices for imports. More often than not, prices for raw materials are falling at a faster rate than prices for industrial goods, causing deterioration of the terms of trade for countries exporting raw materials. The recession in l957/1958 affected the United States more than Western Europe. A large part of Indonesia’s exports, namely 40% (including transit trade via Singapore) is sold to the United States. According to figures of the “Commodity Survey 1958” compiled by the United Nations, the index numbers of the import volume of raw materials declined from 116 in the third quarter of l957 to 95 at the end of the second quarter of 1958, so that during the period of recession—second halfyear l957 and first halfyear l958— the decline amounted to 18% (first quarter of 1957 = 100). The figures on the value of imports indicate a still steeper fall, i.e. by 88 or 22%. Imports of the United States generally remained on the same level during the recession of l957/ 1958, but this clearly did not benefit underdeveloped countries. As explained elsewhere in this report, exports of Western Europe to the United States increased. The decline in the imports of raw materials in the United States may be understood in view of slackening activity in the industrial field, e.g. in the production of motorcars, which resulted in a reduced demand for rubber. Though imports of raw materials in Western Europe, owing to a better economic situation than in the United States, only declined in volume—by 2% in the 4 first half of 1958 if compared with the same period in 1957 — this decline never- theless occurred and, added to developments in the United States, generated con- siderable pressures on the commodity markets during the recession of 1957/1958. Other industrial countries, e.g. Japan also reduced its imports of raw materials, so that the import volume decreased to 85 (first half of 1957 = 100) in the second half of 1958.

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