Inflation eases to 1.26 percent in February: BPS

JAKARTA (JP): Inflation in February moderated to 1.26 percent from 2.97 percent in January due to a lower increase in food prices, the Central Bureau of Statistics (BPS) reported on Tuesday.

Economists said the market expected modest inflation last month but cautioned that the general price increase might accelerate in the run-up to the June 7 general election.

BPS chief Sugito Suwito said the February year-on-year inflation was 53.29 percent, lower than the January year-on-year inflation of 70.66 percent.

He attributed the moderation particularly to the smaller increases in the prices of raw and processed food, beverages, cigarettes and tobacco, which contributed nearly 79 percent to the February drop in inflation.

Raw food prices rose 2.32 percent from January, while the price of processed food, beverages and cigarettes increased by 1.44 percent, he said.

The housing sector rose 0.90 percent, clothing 0.91 percent, health services 0.02 percent, and education, recreation and sports 0.30 percent, BPS reported.

But transportation and communication prices fell by 0.40 percent from the January level, it added.

BPS said the riot-torn city of Ambon suffered the highest inflation level of 6.79 percent in February.

Raden Pardede, a senior economist at PT Danareksa Securities, said the moderate level of inflation last month was made possible by the relatively stable exchange rate of the rupiah against the U.S. dollar.

He explained that the rupiah level was still a major factor in influencing inflation because of the economy's high import of food materials.

"Inflation in the country is still dominated by cost-push inflation, not demand-pull inflation," he said.

Raden said although the market had expected the milder February inflation, the increase in prices in the first semester of this year might reach as high as 15 percent, pushed by a probable hoarding behavior of consumers in the run-up to the June elections.

"The inflation will be more moderate in the second semester," Raden said, adding that the projected inflation for 1999 was around 20 percent if the general election went well.

Indonesia is to hold a general election on June 7 but people have been jittery in the wake of the bloody riots that have plagued several parts of the country since the fall of former authoritarian president Soeharto.

Budi Hikmat, an economist at PT Bahana Securities, agreed that inflation in February was expected to be milder as the high inflation in January was seasonal due to the year-end and Ramadhan festivities that boosted demand.

He said that inflation during the past several months had been mainly caused by peripheral factors.

"If this is the case, curbing inflation through a high interest rate policy is not correct," he said, pointing out that the high interest rate environment would only hamper production and distribution activities, consequently worsening inflation.

He said that the approach should be through market structure promotion by improving the distribution system and encouraging consumers not to hoard basic commodities.

The social unrest and riots in the country have become a serious problem to the distribution system, as transported goods are often stolen and shops and warehouses burned.

Raden, however, maintained that the central bank's high interest policy was correct as it would indirectly stabilize the rupiah.

Foreign trade

BPS also reported that export in December 1998 reached US$3.90 billion, sending the January-December period export value to $48.84 billion, an 8.60 percent drop from that recorded in 1997.

Oil and gas exports in 1998 were worth $7.76 billion, which was a 33.24 percent drop from the level in 1997, while non-oil and gas export value dropped slightly by 1.76 percent to $41.09 billion, BPS said.

It said imports in December totaled $2.49 billion, bringing the total import value for 1998 to $27.42 billion, a 34.20 percent plunge from the same period in 1997, and producing a trade surplus of $21.4 billion for the whole year.

Economists said the country's export industry had failed to benefit from the sharp depreciation of the rupiah against the U.S. dollar because of the difficulties in obtaining trade financing facilities to import the necessary raw materials, fears among foreigners concerning the continuity of supply from the country amid the current social and political upheavals, and the generally weaker global demand.

Budi of Bahana Securities said foreign creditors wouldn't provide trade financing. Even credits under the $18 billion second-line defense facilities organized as part of the IMF's $43 billion bailout scheme would not materialize as long as the country's banking sector was still in difficulties.

Raden foresaw that export this year would still be slow.

"We can't expect an export-lead recovery this year. It's almost impossible," he said, adding that the country would continue to suffer an economic contraction of as high as 3.5 percent in 1999.

Indonesia suffered an economic contraction of 13.68 percent in 1998 (more than 15 percent according to the IMF estimate) due to the economic crisis that started in the middle of 1997.

Raden blamed the crippled domestic economic activities for the plunge in imports.(rei)