Inflation may exceed 80% this year: Indef

JAKARTA (JP): The worsening economy and the government's "populist" approach could push this year's inflation rate to over 80 percent, the Institute for Development of Economics and Finance (Indef) predicts.

The Institute's program director, M. Nawir Messi, said yesterday that the inflation rate might even reach three digits, if the situation did not improve.

Nawir said one of the factors that would drive inflation rates higher this year was the government's "populist" moves under President B.J. Habibie, who replaced Soeharto when he resigned last month.

"Habibie's administration is facing numerous challenges, mainly in getting the people's support, so he comes up with populist measures to win the people's hearts," he told reporters.

The measures included accommodating demands to raise the workers' minimum wage and the civil servants' salaries, he said.

The government's move to restore ailing banks by injecting large funds into the banks, some of which should no longer be saved, was another populist move, he said, adding that the government had to print more money in order to keep the banks alive.

"All this leads to hyper-inflation," he said, adding that the government's attempts to prop up the value of the ailing rupiah would be useless given the sharp increase in the money supply.

Further depreciation of the rupiah, which at present has lost about 85 percent of its value against the U.S. dollar since August last year, would continue to push up prices of imported goods, he said.

According to the Central Bureau of Statistics, inflation reached 35.05 percent in the January to May period this year, compared to 2.71 percent in the same period last year.

The consulting agency challenged the 35.05 percent figure, saying that the inflation rate during the first five months should have reached 40.06 percent.

Nawir said that hyper-inflation would decrease private consumption, which normally accounts for 60 percent of the gross domestic product (GDP) growth, he said.

"Based on this assumption, it is logical that the country's economic growth will contract by 10 percent," he said.

He predicted that the number of poor people would reach 60 million people, much higher than the 50 million estimated by the World Bank.

"With the current persisting trend, half of the country's population could be poor," he said.

Nawir said the tight monetary policy adopted by the government was no longer relevant to curb inflation.

The government sharply raised interest rates to control the rupiah's free-fall against the dollar initially, he said. But the move has proven ineffective in controlling the rupiah's volatility.

"By tightening liquidity through high interest rates, not only does the government absorb idle public funds, but also productive funds," he said.

Indef also urged that the state budget, which was revised in late January due to major changes in the economy resulting from the crisis, should be revised again because the existing budget assumptions no longer reflect economic reality.

The current revised budget is based on the assumption of an oil price of US$16 per barrel and a rupiah exchange rate against the U.S. dollar of Rp 6,000.

Since then the rupiah, which closed yesterday at Rp 14,550 against the dollar compared to Rp 2,500 last July, has sunk further, while the price of crude oil has also fallen to $12.50 per barrel.

If the state budget is not changed and based on the assumption that the rupiah will average about Rp 10,000 to the dollar, the state budget could be Rp 39 trillion in deficit, he said. (das)