Inflation could reach double-digit: Minister

Dadan Wijaksana, The Jakarta Post, Jakarta

The government acknowledged on Thursday for the first time that inflation this year would reach a double-digit rate of around 12 percent.

Coordinating Minister for the Economy Dorodjatun Kuntjoro- Jakti said that inflationary pressure had been high in the first three months of the year, making it harder to achieve the 9 percent target as stated in the 2002 state budget.

"... for 2002, it is estimated there will be a rise ... up to 12 percent or more," he said after a Cabinet meeting.

Dorodjatun did not give any explanation why inflation would surpass the single digit target, but most analysts have predicted a double digit inflation for the year as inflationary pressure during the first couple of months had been quite strong mainly due to the rise in fuel prices.

Inflation was 12.55 percent last year. It rose to 15.13 percent in February and eased to 14.08 percent in March. The cumulative inflation figure in the first three months has already reached 3.5 percent.

In the past five years, inflation has averaged 22.6 percent.

The higher inflation has serious consequences.

Bank Indonesia will be reluctant to lower its benchmark interest rate from the current high of around 16.61 percent if pressure on prices remains strong.

Bringing down the interest rate is crucial to help ease the state budget burden in covering the cost of government bonds issued to bailout troubled banks.

The interest rate of the bonds is linked to the interest rate of the Bank Indonesia SBI promissory notes.

A lower interest rate environment is also important to allow the cash-strapped real sector to obtain bank loans at a lower cost.

A manageable inflation level would also help protect the real earnings of the people who has been enduring years of economic hardship.

But Dorodjatun said that the government would still try hard to cap inflation at 10 percent by the end of the year particularly if the rupiah continued to appreciate against the U.S. dollar.

"The government ambition is still to try to reach 10 percent this year and even lower afterwards," he said.

More confidence in the country would mark an inflow of more dollars to the country, thus giving a boost to the rupiah's performance, he added.

The rupiah has been on an upward trend since the beginning of the year. The local unit reached an 8-month high following the recent rescheduling deal obtained from the Paris Club of creditor nations over the country's $5.4 billion sovereign debt maturing this year and next.

Success in the sale of state assets had also helped boost sentiment in the rupiah, currently at around Rp 9,360 per dollar.

A stronger rupiah would help reduce prices at home as the country's production system is still dependent on imported raw materials.

However, analysts said that the upward trend in the rupiah was limited due to the country's high public debt.

Elsewhere, Dorodjatun also revealed that there had been discussions at the Cabinet meeting on the country's annual development planning for next year.

Since it was only at the preliminary stage, he refused to elaborate on the draft, but stressed the government's intention of not relying too much on domestic consumption as the locomotive for economic growth next year.

The government would instead pin its hopes on improving performance in investment and exports in view of the improving global economic picture ahead.

The government has said that this year's economic growth, projected at around 4 percent, would be primarily driven by domestic consumption as the weak economic conditions globally would slow down exports and investment.