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)