Prices under control

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.