Inflation threatens economic recovery, says economist

BOGOR, West Java (JP): The country's economic recovery process is now being threatened by the inflationary pressure caused by the weakening rupiah and greater demand for goods and services, according to noted economist Sri Mulyani.

Sri said that a low inflation level was a crucial factor to support the recovery of the economy.

"Controlling inflation is a very important key," Sri told a weekend press gathering sponsored by Bank Indonesia.

"During the pre-crisis period, an inflation level of more than 9 percent and a benchmark interest rate of 15 percent was still okay to investors because there was no problem with confidence. But now, if Indonesia could not control inflation below 5 percent, the economy becomes unattractive (to investors)," she added.

The government initially targeted inflation to be a maximum 7 percent this year, but the it had been revised to 8 percent following the recent increase in fuel prices and electricity tariffs.

Sri said that the weakening of the exchange rate of the rupiah against the U.S. dollar had created an "imported inflation" due to the higher cost of the imported goods.

The rupiah has been weakening at between Rp 8,500 to more than Rp 9,000 per U.S. dollar over the past couple of months compared to the government target of Rp 7,000 per dollar for this year.

Sri also said that the higher than expected economic activity had triggered higher demand for goods and services, which caused a demand pull inflation.

She added that the upcoming year-end festivities would also push prices to move even higher.

Bank Indonesia deputy governor Burhanuddin Abdullah admitted that the inflationary pressure could threaten the economic recovery process.

"The economic recovery is still very weak ... one of the vulnerabilities is the high inflation level," Burhanuddin said.

He said that the higher than expected economic activity as reflected in the greater amount of base money at Rp 90 trillion (more than the target set by the IMF) had created inflationary pressure.

Sri said that it was very important for Bank Indonesia to maintain its tight monetary policy to help curb inflation because the government had a tendency to create spending policy which would trigger inflation.

"Our only hope is from the monetary policy side. It's difficult to imagine Bank Indonesia to relax (its monetary policy)," she said.

She said that the central bank tight monetary policy could counter balance the government spending and the stronger public demand.

"If Bank Indonesia eases the monetary policy, it would send a signal to the market that Indonesia is abandoning prudential policy," she said.

"The overseas perception on Indonesia is worrying not only because of politics but also because of the perception that the economic team (ministers) is too relax," she said.

She said that Coordinating Minister for Economic Affairs Rizal Ramli and his team was "action-oriented" men who tended to spend and forget prudent macroeconomic management.

Sri warned the central bank not to surrender to pressure both from politicians and the government to adopt a populist policy at the expense of high inflation.

But Sri also said that Bank Indonesia was in a difficult situation to face outside pressure because of the lack of leadership as its Governor was still under a house arrest and it continued to be dragged on by the controversy over the massive bank liquidity support it injected to troubled banks in the past.

Meanwhile, Burhanuddin said that restructuring the country's private sector overseas debt was important to help reduce pressure on the rupiah.

Burhanuddin said that some US$1.6 billion in corporate overseas debt would mature this month and another $3.5 billion in December.

"The huge amount of overseas debt maturing soon has the potential to weaken the rupiah," he said.

He said that the current weakening of the local unit was partly due to the genuine dollar demand for debt repayment.

The rupiah is hovering at around Rp 9,100 per dollar last week, which is more than a 20 percent drop from the level in the beginning of this year. (rei)