Analysts urge govt to tackle inflation

JAKARTA (JP): Economists are urging the government to continue economic reforms and secure adequate stocks of basic staples to prevent hyperinflation in the country's economy.

Focusing on economic reforms would help stabilize the rupiah, Mari Pangestu, a senior economist at the Center for Strategic and International Studies, said yesterday.

She noted that the sharp depreciation of the rupiah was the primary cause of spiraling prices of consumer goods because Indonesia's products had high import contents.

Mari also said the government should secure adequate supplies of basic food items to control inflation.

"The distribution system should also be improved," she added while commenting on the recently announced 12.76 percent monthly inflation rate for last month.

She suggested that the plans to reduce subsidies on basic necessities be implemented gradually to curb excessive inflationary pressures.

The government agreed in January to an IMF-arranged economic reform program in exchange for bailout funds totaling US$43 billion. The reform program includes abolishing subsidies beginning next month and dissolving state monopolies, including on basic food items.

Mari said the International Monetary Fund (IMF) had indicated that it would allow a gradual reduction of subsidies.

Raden Pardede, an economist at state-owned PT Danareksa Securities, agreed that the battered rupiah was the main reason behind the steep inflation.

"The depreciation of the rupiah (by about 70 percent against the U.S. dollar) has stalled production operations at most plants which largely depend on imported basic materials," Raden noted.

He shared Mari's view that adequate supplies of basic food items were crucial for checking inflation because they contributed some 35 percent to Indonesia's consumer price index.

Mari added that if hyperinflation occurred, the function of the rupiah as a store of value would disappear, prompting people to chase the U.S. greenback or durable goods.

Raden agreed that since many expected future prices to soar, this expectation would be factored in their transactions, thereby creating what he called a self-fulfilling prophecy.

"I think what is urgently needed now is a rebuilding of confidence," he said, adding that the best way to achieve that was to firmly implement the IMF economic reform program.

He said he was against the plan to peg the rupiah to the U.S. dollar at a fixed exchange rate through a currency board system (CBS) to contain inflation and stabilize the currency as Argentina did in the early 1990s.

"Argentina's hyperinflation was caused by excessive money creation, while Indonesia's is being fueled by a supply side problem," he pointed out.

Mari said if Indonesia was not sure about meeting the necessary preconditions for a CBS, then the government should focus its attention on the IMF economic reform program.

President Soeharto said Sunday he was studying the CBS to supplement the IMF program because he believed the Jan. 15 reform package agreed to with the IMF seemed unable to stabilize the rupiah.

But the currency board plan has met strong opposition from the IMF and other countries participating in the IMF-sponsored package. They have argued that Indonesia's situation is not viable for such a fixed rate regime at this point in time.

Raden suggested Indonesia instead learn from South Korea's new President Kim Dae-jung who showed a strong commitment to the IMF- sponsored reform programs, and managed to return public confidence in the economy.

He contended that if Indonesia fully implemented the IMF reforms, confidence would return over time, rating agencies would upgrade Indonesia's sovereign rating and investors would come back to improve domestic liquidity.

"A healthier and stronger banking system will revive economic activities and return the rupiah exchange rate to a market equilibrium that reflects economic fundamentals," Raden added. (08)