Price hikes will curtail economic growth: LIPI

Sari P. Setiogi, The Jakarta Post, Jakarta

The recent rises in utility prices will curtail economic growth by 0.17 percentage points, raise the inflation rate by 2.27 percentage points and reduce the growth of people's welfare by 0.13 percentage points, according to a government research agency.

Wijaya Adi, an economic research associate at the Indonesian Institute of Science (LIPI), told a news conference here on Wednesday that the price hikes would also put 80,000 people out of work and reduce the government's tax revenue by Rp 7.7 trillion (US$855.55 million).

Earlier this month, the government simultaneously increased fuel prices by an average of 22 percent, electricity billing rates by 6 percent and telephone charges by 15 percent, sparking strong protests from employers, workers, university students and other members of society.

"With the rises in utility prices, the Indonesian economy will likely grow by only 3.87 percent this year, lower than the 4 percent targeted by the government," Wijaya said.

He said the price hikes would also increase the prices of other products and services and cause the consumer price index to increase by 11.27 percent this year, 2.27 points higher than the 9 percent targeted by the government.

"Higher inflation will surely cause an increase in the bank's interest rates, which in turn will affect the growth of domestic investment activities," he said. "As a result, about 80,000 people will lose their jobs."

The increase in the price of consumer goods will also lower people's purchasing power and welfare growth, therefore, this figure will most likely fall short of the government's target of 2.55 percent and reach a mere 2.42 percent this year, he said.

Because economic growth will be lower than the previous target, the government's revenue from taxation in the non-oil sector is likely to decline by Rp 1.5 trillion. "If this figure is added to the potential loss of Rp 6 trillion in tax revenue as a result of the government's recent tax incentives, the total potential loss in tax earnings will reach Rp 7.5 trillion," he added.

The government, under its budget plan announced late last year, expects to generate Rp 106.15 trillion from taxation in the non-oil sector.

Wijaya said that because the government was apparently not prepared with the necessary measures to cope with the impact from the utility price hikes, it should revoke the decision.

He explained that the decision to increase the prices showed that the government did not understand people's state of mind.

"The decision on the triple price hikes was made at the wrong time: after a succession of public holidays -- Idul Fitri, Christmas and other year-end festivities. People's finances were already stressed with the extra expenses and some families might have even run out of savings," he said.

"Listening to the government's ad hoc responses toward the recent mass protests against the price hikes, we can also see that the officials did not think beforehand of the possible impacts from the decision," he said. "The government, therefore, should cancel the price hikes."

If the price hikes were considered that urgent and unavoidable, the government should have raised the prices gradually, he said.