BI to meet with new govt on inflation threat
Tony Hotland, Jakarta
Bank Indonesia plans to immediately meet with President Susilo Bambang Yudhoyono and his economic ministers to discuss economic affairs, particularly ways to cope with rising inflationary pressure as a result of the global oil hike.
Aslim Tadjudin, deputy governor of the independent central bank, said that the most crucial issue faced by the new government and Bank Indonesia for the time being was how to keep inflation in check.
"The biggest challenge now is how to keep inflation at a manageable rate, especially amid the strong external economic pressure of soaring oil prices," he said.
Worldwide oil prices have been zooming to record highs over the course of the year, recently peaking at US$55 per barrel, due to concern over shortages, especially with the winter drawing near.
The oil hike increases the production costs of local manufacturers as they have to pay more for fuel, and import raw materials at higher prices. Analysts have said that the higher costs will eventually be passed onto consumers, thus feeding on inflation.
Inflationary pressure in the remaining months of this year will also be stronger particularly due to higher demand for goods and services during the current Muslim fasting month, and upcoming Idul Fitri celebration as well as Christmas and New Year.
The economy has generally enjoyed a low inflationary environment so far this year, enabling the central bank to cut the interest rate, which in turn has allowed commercial banks to provide cheaper loans for the consumer sector, thus maintaining robust domestic consumption, the main engine of economic growth in the past few years.
The current 2004 state budget assumes a full-year inflation target of 7 percent.
The surging oil prices have also put pressure on the new government to raise domestic fuel prices in a bid to reduce the expensive fuel subsidy. Higher fuel prices will increase inflation.
Elsewhere, Aslim said that the central bank will also discuss ways to accelerate economic growth, as promised by Susilo during the election campaign.
"With better cooperation, we hope to be able to realize a rate of growth that is sufficient to offset the unemployment rate. We need to expand by 6 percent to 7 percent at least," said Aslim.
The economy has been growing at a meager rate of around 4 percent per year during the past few years, a level deemed insufficient to provide enough jobs for the millions of unemployed. The economy this year is expected to grow by 4.8 percent.
On the latest weakening of the rupiah, Aslim said that it was due to non-fundamental factors such as dollar purchases by companies to repay maturing overseas debts, and the initial reaction of the financial market to the new Cabinet lineup.
"I suppose the market was indeed a bit unhappy and unimpressed with the Cabinet line-up. But then again, it was mostly due to the high demand from companies to pay their maturing offshore debts," he argued.
Aslim asserted that the rupiah would further appreciate with the support from stronger regional currencies against the greenback, and that the fundamental things affecting the exchange rate were still under control.
The rupiah fell to Rp 9,115 per U.S. dollar on Thursday from Rp 9,080. It quickly bounced back, edging higher at Rp 9,050 on Friday.