Controlling prices

Controlling prices

Amid the current financial uncertainty and rupiah upheaval,
there is some good news. The latest reports from the National
Logistics Agency show the level of its rice stocks, now amounting
to about three million tonnes, is adequate to cover any shortfall
in harvests caused by the prolonged dry season.

This situation will greatly help the government control the
general price rise. Rice, as the national staple, not only weighs
heavily (about 30 percent) in the consumer price index -- which
measures inflation -- but it also strongly influences the prices
of other goods and services.

As the level of inflation influences the rupiah rate and is
one of the key guideposts for the currency to follow until it
reaches its equilibrium rate, the nation's success in checking
inflation at a reasonable level will also determine how long the
current currency turmoil will last.

It is obviously impossible to prevent price rises after the
rupiah has suffered a depreciation of more than 20 percent since
January. Theoretically, any goods with import content will rise
in prices as a result of the weakening rupiah. And we should
magnanimously admit that, though our economy is largely based on
agriculture, we depend on imports for many commodities such as
sugar, soybean and corn.

Likewise, most of our export-oriented manufacturing industries
depend on imported basic and intermediate materials. But adequate
stocks and smooth distribution will prevent imports at least
until the currency stabilizes within a sustainable range.

Further down the track, a calm market of the basic-needs
commodities would help minimize the risk of the economy plunging
into another painful dip. This would only serve to alarm consumer
expectations of a price spiral.

As no one doubts the sound fundamentals of the economy, it is
the direction of the public's expectations that will determine
whether the currency crisis will end soon or drag on and on until
a real economic crisis sets in.

Controlling the inflation rate is also quite essential for the
central bank to ease its monetary policy, thereby remedying the
credit crunch which is now hitting the business sector. The
longer the crunch is maintained, the bigger the risks of business
failures. Things might spiral out of control if the current havoc
in the currency market was accompanied by a chain of
bankruptcies.

The baht upheaval which hit our neighbor, Thailand, last
month, was triggered by a crisis in its financial sector which in
turn was caused by a property bust. Similarly, most of our major
banks are heavily exposed to the property sector which is
especially vulnerable to a credit squeeze.

Another sharp increase in bad debts in this sector might bring
down quite a number of banks with devastating ramifications to
economic stability.

The market, also, should see it as a good signal that the
government is now reviewing its spending programs in another
concerted effort to manage inflation and to prevent the current
account deficit from rising further. It is already at the
dangerous level of 4 percent of the gross domestic product. The
level of the current account deficit is another important
guidepost for the rupiah rate development.

The first target of a retrenchment program should obviously be
big projects with large foreign exchange financing (import
content). This spending cutback is not the first for the
government -- it was in fact a key component of its financial
crisis management in 1986 and in 1991. However, the market,
learning from its past experiences, would not automatically
accept the pronounced spending cut.

Quite often, as in the past, there has been a wide gap between
what the government pronounced to implement and what it really
did. The difference depended on the extent of lobbying by
politically well-connected business groups.

Set against this risk, our most senior economist and former
cabinet minister Sumitro Djojohadikusumo could not be accused of
repetition when he issued a warning last week. He was speaking at
the 20th anniversary reception of the Jakarta stock market when
he said: "The government should not let the state be manipulated
by cabals that are mainly motivated by their own parochial
interests."

The financial crisis today should be seized by the financial
and monetary authorities as a way of convincing the government to
take quick and firm fiscal tightening before the situation
worsens into an economic crisis.