Prices under control
The key economic indicators released after yesterday's cabinet meeting are more evidence that the fundamentals of Indonesia's economy are sound. Minister Harmoko announced after the session that the consumer price index, which measures inflation, rose by only 0.68 percent last month. Even though this figure was much higher than the 0.07 percent deflation recorded in June, the trend should not cause too much worry. For the first seven months of this year, the accumulated inflation was only 4.7 percent, compared to almost 6.1 percent for the same period of last year.
The trend clearly indicates that the government has by and large succeeded in controlling prices, and the tendency of an overheating economy seems to have been controlled. This, however, should not be automatically interpreted as a signal that the monetary authority can immediately ease its tight monetary policy to further lower interest rates because the pressures on the external balance apparently remain strong.
The trade surplus for May, for example, was very low at US$203 million; down from $366 million in April. The May surplus was among the lowest of the last eight months. Exporters have been unable to repeat the export growth rate achieved last year. The slower-than-expected export growth, combined with the steady rise of imports does not give the monetary authority much leeway to relax its monetary policy. The problem is that imports cannot be decreased significantly without affecting manufacturers and the implementation of investment projects, because most manufacturers still rely largely on imported basic and intermediate materials. Likewise, investment projects depend mostly on imported capital goods.
Another encouraging trend with regard to inflation is the adequate stock of food, notably the main staple food, rice, held by the National Logistics Agency. Without a natural disaster, the agency should be able to maintain a safe level of rice stocks until at least next year. The agriculture minister reported at the cabinet meeting that the acreage of rice crops for the 1996 season had expanded by 13.90 percent on the previous season; giving us further confidence. Adequate rice stocks are indeed important, notably in view of the general election next May. The stock of other basic commodities, such as sugar, fertilizers, cooking oil and cement, were also reported to be sufficient.
The remaining challenge of the anti-inflation program seems to be the inter-ministerial coordination for facilitating the smooth distribution of goods from one province to another, from one island to another. The 1.04 percent increase in the price of food last month was caused by the rising prices of fish, eggs and milk. For sure, the higher prices were not caused by shortages because the producers of those commodities in several provinces have been complaining about the extremely low prices of their goods. No wonder, President Soeharto himself has once again called for better inter-ministerial coordination to remove any hurdles encountered in transporting commodities from one area to another. Distribution bottlenecks not only cause market distortions, they also send the wrong signals to producers, notably the farmers, regarding the allocation of their scarce resources.