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.