Indonesian Experience with Financial Sector Reform

Abstract

Indonesian Experience with Financial Sector Reform Since the early 1980s Indonesia has been engaged in serious efforts to reform the financial system, and thereby stimulate sounder economic growth. This paper discusses the nature of the specific reforms carried out in Indonesia, the environment in which they were undertaken and, most importantly, their effects on the real economy. It finds that a fairly standard, phased series of reforms led to large, sustained increases in financial savings, increases in real savings, new financial products and more cost effective banks. Credit allocation suffered, however, as state banks and new entrants made loans that became nonperforming. The unusual feature of the reforms, opening the capital account before the financial sector, did not have adverse effects. Rather, the open capital account aided macroeconomic management by providing quick feedback when domestic policies moved out of line and by limiting the inflationary consequences of excessive demand stimulus. Indonesia's experience highlights the need for macroeconomic management that recognizes the limitations imposed by fiscal and external constraints and responds quickly to those constraints. ' This total does not include Fx time deposits. Source: Bank Indonesia and author's calculations. were still longer than those of demand deposits. For all banks, 24-month deposits shrank to only 10.5 per cent in 1988, as compared to 45.7 per cent in 1982. The deregulation of savings deposits has led

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