Inflation may hit triple digits, economists warn

Inflation may hit triple digits, economists warn

JAKARTA (JP): Senior economists warned here yesterday that the
inflation rate might run into treble figures if the government
fails to limit spending on subsidies and fortifying the ailing
banking sector.

Djisman Simanjuntak, an economist at Prasetya Mulya business
school, said that if the government ignored the high inflationary
pressure then the country could fall into a hyperinflation trap.
He said that if inflation was allowed to hit 100 percent it would
then become very difficult to control.

"That is characteristic of inflation. The higher it gets the
more difficult it gets to control," he said at a seminar on the
monetary crisis.

Sjahrir, another economist, shared Djisman's view about high
inflationary pressure.

He said that high government spending on subsidies and bailing
out the troubled banking sector made it very difficult to fight
inflation.

Inflation is forecast to reach 80 percent later this year. It
was running at more than 46 percent between January and June.

He said that to stave off hyperinflation the government would
have to act quickly to strengthen the banking sector and avoid
committing itself to costly populist policies.

"Our state budget is very populist," he said, referring to the
numerous subsidy commitments which it contains.

He explained that although subsidies were popular, the
pressure to print more money with which to finance them was high
given the current political uncertainty.

"But we're likely to see populist policies for the next six
years," he said, pointing out that President B.J. Habibie would
try hard to stay in office for another full term.

He urged the Habibie administration to only subsidize rice for
the poor.

He said that welfare would not decline by much if people were
forced to consume less cooking oil and wheat, or use less fuel
and electricity.

"If we continue along present lines then PLN (the state
electricity company) and Pertamina (the state oil company) will
go bankrupt or force the government to get Bank Indonesia to
print more money," he said.

The total cost of subsidies in the 1998/1999 state budget is
expected to reach 7.5 percent of gross domestic product. The bill
will largely be met by foreign aid donors.

The government has also banned the export of certain
subsidized commodities, including rice, sugar, wheat and wheat
flour.

Djisman said that a risk of hyperinflation also stemmed from
the huge liquidity support which the government has injected into
troubled banks.

Liquidity credits have reached more than Rp 130 trillion and
have expanded the money in circulation, presenting a serious
inflationary danger.

Recovering this outlay through restructuring of the banking
sector was critical to curbing inflationary pressure, Djisman
said.

However, he said the restructuring process would be a very
tough job because the options available to clean up bad debts
were limited.

He explained that transferring ownership of collateral used
against bad debts to the government-owned Asset Management Unit
(AMU) may not be the right option under the current
circumstances.

"Taking over and selling the collateral used against bad debt
would not pay under the current circumstances because many assets
are currently undervalued," he said.

The government established the Indonesian Bank Restructuring
Agency (IBRA) in January to recover the huge liquidity bailout
given to troubled banks and to oversee restructuring of the
banking sector. The agency is expected to launch the AMU in the
near future.

The AMU is expected to take over the bad debts of banks under
IBRA supervision before they are merged and sold to investors.

"This mechanism will create moral hazards for both bank owners
and debtors," Djisman said, adding that in many cases the owners
were also the debtors.

The sharp depreciation in the value of the rupiah against the
U.S. dollar has caused more than 50 percent of existing loans to
turn bad, he said.

Djisman also urged the authority to concentrate on
restructuring banks which were not under its control because they
too had many bad loans.

Bank Indonesia deputy director Burhanuddin Abdullah admitted
that high inflation and the sharp contraction in the economy were
the central bank's greatest concerns for the time being.

"A 12 percent contraction in the economy usually only occurs
in wartime," he said, adding that to ease the impact of this,
more credit would be given to small scale businesses.

He added that BI would maintain its tight monetary policy to
curb inflation and stabilize the rupiah.

However he stressed that tight monetary controls would not
work well without a healthy banking system. (rei)