New deregulation may lead to high inflation

JAKARTA (JP): The government's new deregulatory measures significantly easing restrictions for foreign investors may encourage rapid development of investment projects that will in turn lead to high inflation, an economist says.

"The new deregulation will likely cause a rush on land acquisition and purchases of construction materials, thereby pushing consumer prices higher," Dorodjatun Kuntjorojakti, an economics lecturer at the University of Indonesia, told reporters here yesterday.

He said after delivering a speech during a tourism workshop that the new deregulation, which was announced by the government last week, will encourage foreign investors to establish industrial facilities in Indonesia.

The government, under Government Regulation No. 20/1994, reduces the minimum equity holding for Indonesian partners in foreign joint ventures, removes the compulsory divestment requirements and allows foreign investors to get involved in the development and management of infrastructure facilities.

Dorodjatun said the new deregulation is attractive enough to encourage foreign investors to set up investment projects on islands other than Java, where infrastructure facilities have not been adequately developed.

"There will be large-scale projects, including those on infrastructures, to be developed by foreign investors," he said.

He said the expected good response of investors towards the new deregulation may support rapid expansion of the country's economic activities.

"But we must be alert that too strong a response may cause high inflation," he said.

The country's inflation during the first five months of this year reached 4.47 percent, close to the maximum of five percent that the government wants maintain within the year.

Airlines

Meanwhile, an airline executive said yesterday the new government policy will help domestic airlines obtain fund infusions for expansion, but on the other hand, may cause tighter competition.

"The policy will indeed smooth domestic businessmen in getting foreign investment," Secretary General of the Indonesian National Air Carrier Association Benny Rungkat said.

However, he suggested a follow-up plan for the government.

"They should simplify bureaucratic procedures, especially at local offices," he said. (icn)