Inflation threatens economic recovery, says economist

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)