Analysts urge govt to tackle inflation

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.
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