RI misses chance to cut inflation on dollar woes

Urip Hudiono, The Jakarta Post/Jakarta

With a fuel price hike just around the corner and likely to put pressure on inflation, monetary authorities should have let the rupiah appreciate against the dollar to help release some of that inflationary steam beforehand, analysts said.

Unfortunately, the local unit is still holding ground at around Rp 9,000 per U.S. dollar, experiencing almost no significant gains against the greenback, which recently has dropped in value against major currencies due to concerns over U.S. twin budget and current account deficits.

Besides attributing the situation to the still-high local demand for dollars overwhelming its supply, economic observer Goei Siauw Hong said that it also had to do with Bank Indonesia's (BI) intention of keeping the rupiah at a stable rate.

"It then depends on whether BI's priority in doing so is to keep inflation in check, or maintain the competitiveness of Indonesian exporters," he said.

From what he saw, Goei said that it was possibly the latter, as the central bank has not fully released the rupiah's exchange rate to the market, and was even buying dollars from exporters.

"By doing so, it could very well have to issue more rupiah bills, and therefore affect the inflation," he said.

"In my opinion, BI should have traded off more of the export competitiveness for inflationary benefits, especially considering the government's plan to raise fuel prices."

With a stronger rupiah, the price of imported goods can be kept low, thus reducing inflation, which some say could threaten the economy if the government proceeds with its plan to raise fuel prices sometimes in the first quarter of next year.

On the other hand, it could well hurt exporters, as their production costs in rupiah would rise relatively towards their export revenue in dollars.

A stronger local currency in theory could also make Indonesian export goods more expensive in the overseas market compared to similar products coming from countries whose currencies do not appreciate against the dollar.

Although Indonesian monetary officials have floated the rupiah's exchange rate, it still keeps a tight eye over it, to prevent speculators from wreaking havoc to its value as they did during the 1997 financial crisis.

Economist Didik J. Rachbini however said that the current rupiah exchange rate at around Rp 9,000 was already a win-win solution for all.

"It's still high enough for exporters, and low enough for importers," he said.

Meanwhile, concerning impacts of the weakening dollar towards Indonesia' foreign currency reserves, Goei suggested that BI diversify it from dollars to other currencies, such as the 12- nation euro or the Japanese yen.

"This is to prevent a further decline of the reserve's value if the dollar continues to drop," he said.

Bank Mandiri chief economist Martin Panggabean however said that such a policy was not needed, as the composition of foreign currencies in the reserves was already of a fair balance. Martin declined to elaborate, saying the figures were confidential.

BI previously said that it would convert its dollar holdings in the reserves -- which accounts to some 95 percent -- into other currencies.

But Indonesia could well miss out on the trend, as tides start to shift. Monetary officials in Europe, Japan, China, Taiwan and South Korea are now considering market interventions to slow down the dollar's plunge, to prevent it from hurting their exports.