BI to meet with new govt on inflation threat

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.