Inflation may exceed 80% this year: Indef

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)