Bud of hyper-inflation<\/p>\n
A 12.76 percent rate of inflation last month, almost double
\nthe general price rise in January and way above last year's 11.05
\npercent rate of inflation, could be the bud of hyper-inflation if
\nthe rupiah remains weak and unstable for much longer. For
\ninflation to have taken such a leap when the price of most
\nstaples was still subsidized leaves people understandably
\napprehensive of what will happen when those subsidies are one by
\none repealed.<\/p>\n
The government is bound by its long-term commitment to reform
\nto cut subsidies, beginning next month with fuel oil and
\nelectricity. Sugar and wheatflour will follow shortly, as the
\ngovernment has said that the price of these two commodities will
\nbe set on the open market. A large part of the demand for these
\ncommodities is met through imports and so when subsidies are
\nremoved, another huge wave of inflationary pressure may sweep
\nthrough the economy.<\/p>\n
That nothing more rapidly unsettles an economy than currency
\ndevaluation with attendant inflation is the blunt message once
\nagain being driven home. In this context, President Soeharto has
\nconducted a near-obsessive search for a quick fix solution to the
\nvolatile, downward plunge of the rupiah, which has since July
\nlast year lost over 70 percent of its value against the American
\ndollar.<\/p>\n
The battered rupiah and high inflation have been eating away
\nat the purchasing power of most wage earners at the same time as
\nmany business ventures have folded and many, many more are on the
\nverge of bankruptcy. Worsening lifestyles and job insecurity have
\nmade people restless, nervous and highly susceptible to believing
\nwild rumors. The catalyst for January's panic buying episode was
\nuncertainty over food availability. People did not know if they
\nwould be able to eat in the days following the incident.
\nUncertainty was also responsible for severe shortages of several
\nbasic commodities last month, and that despite the fact that
\ndomestic production capacity is more than adequate for current
\ndomestic demand.<\/p>\n
It is difficult to imagine what might happen next month, when
\nthe government begins to reduce subsidy spending and a further
\nwave of price rises hits the population at large. The social and
\npolitical situation could be destabilized, causing the whole IMF
\nreform package to be removed from the national agenda. The nation
\nwould have to struggle for its very survival.<\/p>\n
Top priority must be given to restoring immediately the
\nstability of the rupiah, something that the IMF package is
\nunlikely to deliver. That is why President Soeharto has been
\nmulling over what he believes to be the most promising solution,
\nor perhaps salvation -- a fixed exchange rate under a currency
\nboard system (CBS).<\/p>\n
The advantages and disadvantages of CBS have been exhaustively
\ndebated since early last month. We feel that the President and
\nhis team of advisers have now had more than enough inputs to be
\nable to decide on the most appropriate option for Indonesia.<\/p>\n
Whatever arrangements are made to stabilize the rupiah
\nexchange rate, the move would be unlikely to carry any
\ncredibility unless immediately supported by a more concerted
\neffort to address the crisis in public confidence in the
\ngovernment.<\/p>\n
The President acknowledged the paramount importance of
\nrestoring confidence in his accountability speech on Sunday and
\nconceded that the loss of confidence was the primary cause of
\n\"the numerous difficult problems we are encountering today\".
\nUnfortunately he did not magnanimously cite the reasons behind
\nthe loss of confidence.<\/p>\n
In introspection, it is worthwhile to recount that when the
\ngovernment first called in the International Monetary Fund last
\nOctober for assistance it was then heralded as a preemptive
\nbailout program to boost confidence.<\/p>\n
But what we are now painfully enduring is a self-perpetuating
\noverreaction by the foreign exchange and financial markets caused
\nby the government's failure to deal with the economic situation
\nbefore a full blown crisis had developed. When the first IMF
\nreform package of Nov.1, 1997 was broadened and rewritten on Jan.
\n15, it appeared as though the government was implementing the
\nreforms under duress. This inflicted a greater damage -- one from
\nwhich recovery will be slower.<\/p>\n
There is no quick solution to regaining confidence, or to
\nending the currency crisis. Confidence is earned through
\nprudence, wise policies backed up by efficient and consistent
\nimplementation and fair and honest conduct. These principles are
\nthe basic elements of good governance. Without the support of
\npublic confidence, any fixed exchange rate regime will lack
\ncredibility. It might be effective in the short term, but only
\nmomentarily, buying a small amount of time before the foundations
\nof our modern economic system collapsed.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/bud-of-hyper-inflation-1447893297",
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"sponsor": "Okusi Associates",
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