Price hikes risk RI growth engine, analysts say<\/p>\n
Berni K. Moestafa, The Jakarta Post, Jakarta<\/p>\n
Aggressive moves to raise fuel and electricity prices will
\nease subsidy pressure on the state budget, but undermine the only
\neconomic drive the government depends on, which is consumer
\nspending, analysts say.<\/p>\n
For the first time, the government has decided to raise the
\nprices of three vital commodities -- fuel, power and telephone
\nservices -- simultaneously in one month.<\/p>\n
Over the next few days, the average price of fuel will rise by
\n30 percent, electricity by 6 percent and telephone rates by 15
\npercent.<\/p>\n
A triple blow like this, analysts say, will see the year start
\noff with January inflation well above 1 percent, compared to 0.33
\npercent in the same month last year.<\/p>\n
\"Compounding the surge in inflation will be left-over pressure
\nfrom last month's festive seasons,\" said Bustanul Arifin,
\ndirector at the Institute for Development of Economics and
\nFinance (Indef) over the weekend.<\/p>\n
Monthly inflation last December stood at 1.62 percent and in
\nNovember 1.72 percent. On year inflation for 2001 was 12.55
\npercent.<\/p>\n
Inflation pressure may further endure because the government
\nplans quarterly power rates increases throughout the year.<\/p>\n
Bustanul said concerns of continued high inflation rates
\nremained strong at a time when consumer spending was likely to
\nwane.<\/p>\n
Last year's inflation of 12.55, compared to 9.35 percent a
\nyear before, did not prevent consumption from pushing the economy
\nup 3.5 percent amid falling export revenue.<\/p>\n
But now consumption may have started to lose steam. For one
\nthing, Bustanul said, domestic consumption by itself was a weak
\nbase to rely on for economic growth.<\/p>\n
\"It (consumption) makes for a bad quality of growth, it's
\nfragile and goes hand in hand with inflation,\" he said.<\/p>\n
Consumption drives inflation up, which in the end puts a
\ndamper on economic growth.<\/p>\n
Last week, the government said the economy grew in 2001 by
\nsome 3.5 percent on the back of strong domestic consumption.<\/p>\n
For the first time since Indonesia was struck by the 1997
\nfinancial crisis, its economy had to rely on its own strength.<\/p>\n
Indonesia was deprived of its export market since the U.S.
\neconomy, hit by the crash in the dot-com industry, slowed down
\nand dragged the rest of the world to the brink of recession.<\/p>\n
As all wait for the turnaround in the global economy, the
\ngovernment targets another 4 percent growth in 2002, expecting
\nconsumption to remain robust.<\/p>\n
But Bustanul added that consumption-led economic growth was
\nnot sustainable as it mostly spent money on nonproductive assets.<\/p>\n
\"Good quality growth comes from investment activities, as they
\ngenerate revenue and create employment,\" he said.<\/p>\n
The key to investment and consumer spending lies with Bank
\nIndonesia's benchmark rates, according to Baradita Katoppo,
\npresident at research firm IBAS.<\/p>\n
\"If BI (Bank Indonesia) lowers its rates, people will stop
\nplacing their money in banks, so consumer spending may rise, and
\ninvestment will pick up,\" he explained.<\/p>\n
Bank Indonesia's promissory notes have been hovering at over
\n17 percent for the most part of the year, as it battles pressure
\non inflation and the rupiah.<\/p>\n
\"Since pressure against inflation and the rupiah persisted,
\ninterest on Bank Indonesia promissory notes is likely to remain
\nhigh,\" Baradita said.<\/p>\n
Bank Negara Indonesia (BNI) economy and banking analyst Ryan
\nKiryanto said the central bank may aim for lower rates this year.<\/p>\n
He said Bank Indonesia had kept its rates firm for too long,
\nand might lower them on signs of political stability.<\/p>\n
\"There is some hope that political stability will encourage
\ninvestment and consumer spending,\" he said.<\/p>\n
Last year, the six months of political turmoil prior to
\npresident Abdurrahman Wahid's ouster virtually pushed investors
\nto the sidelines.<\/p>\n
Bustanul warned that the risk of renewed political instability
\nwas high. \"We have not yet returned to political stability, what
\nwe're seeing here is a political pause,\" he said.<\/p>",
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