Price hikes risk RI growth engine, analysts say

Berni K. Moestafa, The Jakarta Post, Jakarta

Aggressive moves to raise fuel and electricity prices will ease subsidy pressure on the state budget, but undermine the only economic drive the government depends on, which is consumer spending, analysts say.

For the first time, the government has decided to raise the prices of three vital commodities -- fuel, power and telephone services -- simultaneously in one month.

Over the next few days, the average price of fuel will rise by 30 percent, electricity by 6 percent and telephone rates by 15 percent.

A triple blow like this, analysts say, will see the year start off with January inflation well above 1 percent, compared to 0.33 percent in the same month last year.

"Compounding the surge in inflation will be left-over pressure from last month's festive seasons," said Bustanul Arifin, director at the Institute for Development of Economics and Finance (Indef) over the weekend.

Monthly inflation last December stood at 1.62 percent and in November 1.72 percent. On year inflation for 2001 was 12.55 percent.

Inflation pressure may further endure because the government plans quarterly power rates increases throughout the year.

Bustanul said concerns of continued high inflation rates remained strong at a time when consumer spending was likely to wane.

Last year's inflation of 12.55, compared to 9.35 percent a year before, did not prevent consumption from pushing the economy up 3.5 percent amid falling export revenue.

But now consumption may have started to lose steam. For one thing, Bustanul said, domestic consumption by itself was a weak base to rely on for economic growth.

"It (consumption) makes for a bad quality of growth, it's fragile and goes hand in hand with inflation," he said.

Consumption drives inflation up, which in the end puts a damper on economic growth.

Last week, the government said the economy grew in 2001 by some 3.5 percent on the back of strong domestic consumption.

For the first time since Indonesia was struck by the 1997 financial crisis, its economy had to rely on its own strength.

Indonesia was deprived of its export market since the U.S. economy, hit by the crash in the dot-com industry, slowed down and dragged the rest of the world to the brink of recession.

As all wait for the turnaround in the global economy, the government targets another 4 percent growth in 2002, expecting consumption to remain robust.

But Bustanul added that consumption-led economic growth was not sustainable as it mostly spent money on nonproductive assets.

"Good quality growth comes from investment activities, as they generate revenue and create employment," he said.

The key to investment and consumer spending lies with Bank Indonesia's benchmark rates, according to Baradita Katoppo, president at research firm IBAS.

"If BI (Bank Indonesia) lowers its rates, people will stop placing their money in banks, so consumer spending may rise, and investment will pick up," he explained.

Bank Indonesia's promissory notes have been hovering at over 17 percent for the most part of the year, as it battles pressure on inflation and the rupiah.

"Since pressure against inflation and the rupiah persisted, interest on Bank Indonesia promissory notes is likely to remain high," Baradita said.

Bank Negara Indonesia (BNI) economy and banking analyst Ryan Kiryanto said the central bank may aim for lower rates this year.

He said Bank Indonesia had kept its rates firm for too long, and might lower them on signs of political stability.

"There is some hope that political stability will encourage investment and consumer spending," he said.

Last year, the six months of political turmoil prior to president Abdurrahman Wahid's ouster virtually pushed investors to the sidelines.

Bustanul warned that the risk of renewed political instability was high. "We have not yet returned to political stability, what we're seeing here is a political pause," he said.