'Inflation could exceed target'

The Jakarta Post, Jakarta

Minister of Finance Boediono said on Thursday that full-year inflation could reach 7 percent, exceeding the government's target, mainly due to the fall of the rupiah against the U.S. dollar.

He said the drop in the value of the rupiah against the U.S. dollar had pushed up the price of goods because imported raw materials were now more expensive.

The government has projected inflation this year at 6.5 percent. It also assumed an average exchange rate of Rp 8,600 against the U.S. dollar.

But the rupiah has been under pressure due to a combination of political jitters at home during the current election year and rising U.S. interest rates, which have prompted investors to switch to dollar-based assets.

The rupiah has declined by about 6 percent since the start of the year. The rupiah ended Thursday flat at Rp 8,960 as most players remained on the sidelines ahead of the second round of the presidential election on Sept. 20.

Inflation over the past two months has been accelerating. In June, the consumer price index rose to 6.8 percent on an annual basis as prices of most goods and services increased amid the falling rupiah.

The stronger inflationary pressure could force the central bank to increase its benchmark interest rate, a move that would eventually add to the burden on the state budget in servicing the government's huge domestic debt.

The higher rate would in turn also make it more difficult for banks to extend loans to the corporate sector.

Bank Indonesia has been determined to control inflation, seen as one of the key conditions for accelerating the economic recovery. The country, in the wake of the late 1990s financial crisis, suffered from hyperinflation.

Elsewhere, Boediono said consistency and nondiscrimination in government policies were key factors in attracting new direct investment.

"What are needed are consistent and nondiscriminative policies. This will help reduce the risk of investing in Indonesia," he said.

He was commenting on an earlier report from the Investment Coordinating Board that approved foreign direct investment declined by 34 percent to about US$3.05 billion in the fist half of this year compared to the same period last year.

Boediono also said further reform of the judicial, tax and excise sectors, as well as improving good governance, were equally important for improving the investment climate.