Controlling prices<\/p>\n
Amid the current financial uncertainty and rupiah upheaval,
\nthere is some good news. The latest reports from the National
\nLogistics Agency show the level of its rice stocks, now amounting
\nto about three million tonnes, is adequate to cover any shortfall
\nin harvests caused by the prolonged dry season.<\/p>\n
This situation will greatly help the government control the
\ngeneral price rise. Rice, as the national staple, not only weighs
\nheavily (about 30 percent) in the consumer price index -- which
\nmeasures inflation -- but it also strongly influences the prices
\nof other goods and services.<\/p>\n
As the level of inflation influences the rupiah rate and is
\none of the key guideposts for the currency to follow until it
\nreaches its equilibrium rate, the nation's success in checking
\ninflation at a reasonable level will also determine how long the
\ncurrent currency turmoil will last.<\/p>\n
It is obviously impossible to prevent price rises after the
\nrupiah has suffered a depreciation of more than 20 percent since
\nJanuary. Theoretically, any goods with import content will rise
\nin prices as a result of the weakening rupiah. And we should
\nmagnanimously admit that, though our economy is largely based on
\nagriculture, we depend on imports for many commodities such as
\nsugar, soybean and corn.<\/p>\n
Likewise, most of our export-oriented manufacturing industries
\ndepend on imported basic and intermediate materials. But adequate
\nstocks and smooth distribution will prevent imports at least
\nuntil the currency stabilizes within a sustainable range.<\/p>\n
Further down the track, a calm market of the basic-needs
\ncommodities would help minimize the risk of the economy plunging
\ninto another painful dip. This would only serve to alarm consumer
\nexpectations of a price spiral.<\/p>\n
As no one doubts the sound fundamentals of the economy, it is
\nthe direction of the public's expectations that will determine
\nwhether the currency crisis will end soon or drag on and on until
\na real economic crisis sets in.<\/p>\n
Controlling the inflation rate is also quite essential for the
\ncentral bank to ease its monetary policy, thereby remedying the
\ncredit crunch which is now hitting the business sector. The
\nlonger the crunch is maintained, the bigger the risks of business
\nfailures. Things might spiral out of control if the current havoc
\nin the currency market was accompanied by a chain of
\nbankruptcies.<\/p>\n
The baht upheaval which hit our neighbor, Thailand, last
\nmonth, was triggered by a crisis in its financial sector which in
\nturn was caused by a property bust. Similarly, most of our major
\nbanks are heavily exposed to the property sector which is
\nespecially vulnerable to a credit squeeze.<\/p>\n
Another sharp increase in bad debts in this sector might bring
\ndown quite a number of banks with devastating ramifications to
\neconomic stability.<\/p>\n
The market, also, should see it as a good signal that the
\ngovernment is now reviewing its spending programs in another
\nconcerted effort to manage inflation and to prevent the current
\naccount deficit from rising further. It is already at the
\ndangerous level of 4 percent of the gross domestic product. The
\nlevel of the current account deficit is another important
\nguidepost for the rupiah rate development.<\/p>\n
The first target of a retrenchment program should obviously be
\nbig projects with large foreign exchange financing (import
\ncontent). This spending cutback is not the first for the
\ngovernment -- it was in fact a key component of its financial
\ncrisis management in 1986 and in 1991. However, the market,
\nlearning from its past experiences, would not automatically
\naccept the pronounced spending cut.<\/p>\n
Quite often, as in the past, there has been a wide gap between
\nwhat the government pronounced to implement and what it really
\ndid. The difference depended on the extent of lobbying by
\npolitically well-connected business groups.<\/p>\n
Set against this risk, our most senior economist and former
\ncabinet minister Sumitro Djojohadikusumo could not be accused of
\nrepetition when he issued a warning last week. He was speaking at
\nthe 20th anniversary reception of the Jakarta stock market when
\nhe said: \"The government should not let the state be manipulated
\nby cabals that are mainly motivated by their own parochial
\ninterests.\"<\/p>\n
The financial crisis today should be seized by the financial
\nand monetary authorities as a way of convincing the government to
\ntake quick and firm fiscal tightening before the situation
\nworsens into an economic crisis.<\/p>",
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