Government urged to ease its grip on inflation

JAKARTA (JP): The government should start easing its grip on consumer price index components because inflation has started to drop, experts said yesterday.

Legislator Tadjudin Noer Said of the House Budgetary Commission and economist Mari E. Pangestu of the Centre for Strategic and International Studies agreed that the government's sound monetary and fiscal management had helped reduce inflation for the last fiscal year.

"We have to commend the government for such a good achievement, although it is still above the target of 5 percent per annum for the current Five Year Development Plan," Tadjudin said yesterday.

The government reported earlier that inflation in the last fiscal year to March 31 was 5.17 percent, the lowest since the 1985/1986 fiscal year.

But Tadjudin said the government needed to review the achievement because it might result from an economic slump rather than from comprehensive anti-inflation measures.

The 5.17 percent inflation rate did not represent real inflation because Indonesia's consumer price index covered only basic needs, most of which are controlled by the government, he said.

"The government's interventions exist in most components of our consumer price index. Just take the prices of fuel, rice and the other nine basic commodities. The government has interference power over them through subsidies," Tadjudin said.

He said although some subsidies, like those for fertilizers and fuel, were accounted for in the state budget, many more were not reported in the budget.

The unreported subsidies include those for stabilizing the prices of rice, sugar, flour, and cooking oil, which are managed by the National Logistic Agency, he said.

Bank Indonesia, the central bank, often disburses subsidized liquidity credits to the agency for price stabilization programs.

"We are in the dark about those subsidies. But I think if the government removed those subsidies, inflation would have been higher than that officially recorded. Therefore, the government needs to relax its control gradually to achieve sustainable low inflation in the future," Tadjudin said.

Mari warned that the government might loosen control over fuel prices after the May general election which would cause inflation to rise.

She predicted inflation would increase after the general elections because most investors would start implementing their investment plans, which had been put on hold until after the election.

"Investment booms like this will cause a specific dilemma for Bank Indonesia, especially in managing the level of bank interest rates," Mari was quoted by Antara as saying.

Although the country posted relatively low inflation last fiscal year, Mari predicted interest rates would remain high because the central bank would impose a tight-monetary policy.

Deposit rates could decline further from about 15 percent a year, but lending rates would remain high at about 19 percent to 20 percent a year, she said.

"Bank Indonesia reckons that any tinkering with interest rates will directly influence the national banking system," she said. (rid)