Drastic rupiah change, its benefits and risks

The rupiah's sharp appreciation against the U.S. dollar in the last few weeks will influence the Indonesian economy positively if it is followed by stability, says Pande Raja Silalahi, a senior economic researcher at the Center for Strategic and International Studies (CSIS).

Question: What is the most convenient level for the rupiah under Indonesia's current economic condition?

Answer: The rupiah's most convenient level for the time being is about Rp 9,000 to Rp 9,500 against the dollar. That level is also convenient for the government's 2001 state budget, which is calculated on an estimated average dollar value of Rp 9,600.

The rupiah has appreciated to about Rp 8,600 per dollar merely on (positive) sentiments in the society.

Q: Have you considered the purchasing power parity in estimating the most convenient level for the rupiah's value?

A: If we consider the existing data on purchasing power parity, the equilibrium level for the rupiah's value might be less than Rp 9,000 per dollar. But the problem is we cannot rely on those data.

Q: Do you see problems with the current appreciation of the rupiah?

A: The problem is that the appreciation is too drastic. A too drastic appreciation of the rupiah may cause difficulties to exporters and domestic producers and, as a result, it may affect the economy. It will not matter if the rupiah appreciates to less than Rp 9,000 per dollar if the appreciation is gradual, giving adequate time for business people to make necessary adjustments.

Q: How far does the drastic appreciation affect exports?

A: Exporters usually have to provide three-month iron stocks of imported raw/basic materials. That means they by now have imported materials bought with dollars worth more than Rp 11,000 each, while the dollars that they will receive from exports will be worth less than Rp 9,000 each. They will face difficulties because the rupiah has appreciated by about 30 percent, while their profit margin is less than 30 percent.

Q: But some exports, such as those of agro-based products, are not dependent on imports. Does the drastic appreciation of the rupiah, all in all, do more harm or good to our exports?

A: It does more harm than good, at least, for the time being. That is why we hear loud complaints from business people, including those producing raw materials in various regions.

Q: What about the impact of the rupiah's appreciation on Indonesia's imports?

A: Because Indonesia's economy is about 70 percent dependent on imports, the rupiah's appreciation will significantly reduce the country's rupiah spending for imports.

Q: Does it also mean that the rupiah's appreciation will drive consumer prices lower?

A: Even though importers have procured their goods with expensive dollars, consumer prices will decline soon -- perhaps within one and a half to two months -- because competition in the domestic market is very tight.

Q: So the inflation rate will decline in the coming months?

A: It is true that import pressures on inflation will decrease in line with the rupiah's appreciation. But because importers will need some time to adjust their sales prices, the positive impact on inflation will be effective in, say, November. But by that month, demands for goods will increase due to the Idul Fitri Muslim holiday and Christmas celebrations the following month. The inflation rate will thus remain high in the coming months. A cumulative inflation rate of about 10 percent to 12 percent is possible for the whole year, as compared to the previous estimate of between 12 percent and 13 percent.

(The inflation rate reached 2.12 percent in July, bringing the cumulative inflation rate to 7.7 percent during the first seven months of the year.)

Q: And what about the appreciation's impact on agricultural activities?

A: It does more good than harm to our agricultural activities because most of our agricultural products are for domestic consumption.

Q: Will the rupiah's appreciation help encourage investors to start new businesses?

A: Investors, in starting new businesses, will seriously take stability into consideration as it is factor they can use to calculate profitability. Indonesia used to be a profitable place for investment before the economic crisis. If the economic conditions are stable, investing in Indonesia will again be profitable.

It is true that the situation in Indonesia is now stable and predictable and the country, therefore, should now be attractive for new investments. But there will always be a time lag for investors to come into Indonesia.

Q: How far will the rupiah's appreciation influence the economic growth?

A: The appreciation, together with some other factors, will likely influence the economic growth positively, so the country's gross domestic product (GDP) is likely to grow by 3.5 percent this year.

(According to the Central Bureau of Statistics, the GDP grew by 3.37 percent during the first semester of this year.)

Q: Do you think the rupiah's value will continue to increase or decrease in the coming months?

A: It depends on future developments. If the government (under an agreement with creditors), for example, can delay the repayments of some debt, the rupiah's value may remain at its current level. On the contrary, a slowdown in export growth can affect the rupiah's value. (Rikza Abdullah)