Single digit inflation still possible, says IMF

The Jakarta Post, Jakarta

The International Monetary Fund (IMF) said Tuesday that the country was still on track to achieve its single-digit inflation target, despite the rupiah's renewed weakness against the U.S. dollar.

The IMF's senior representative in Indonesia, David Nellor, said he expected inflation to fall below 10 percent by the year's end.

"There has been an improvement since the beginning of the year and it's possible to achieve single-digit inflation at the end of the year," Nellor told reporters.

The government has targeted a 9 percent inflation level this year, lower than last year's 12.55 percent.

Inflation has been in a declining in the past several months, with annual inflation falling from 15.13 percent in February to 11.48 percent in June. The easing inflationary pressure was made possible with the help of a stronger rupiah, which has been one of the best performing currencies in the region during the first half of this year, which made imported goods cheaper.

But as the rupiah has weakened again lately, there is now concern that inflation could rise again, putting at risk the government's single-digit inflation target.

However, Nellor was not of that opinion, saying the rupiah's recent shaky performance would be short-lived and that he expected the local currency to stabilize again in the near future.

He gave no further explanation of what would cause the rupiah to stabilize.

The rupiah is now hovering at around Rp 9,000 per U.S. dollar, compared to around Rp 8,500 in April.

On Tuesday, the rupiah closed at ...per dollar.

Keeping the rupiah stable and slowing down inflation has provided enough leeway for the central bank to lower its benchmark interest rates. The lower interest rate is crucial to help reduce the burden of the state budget in covering the cost of government bonds issued in the late 1990s to finance its bank bailout program.

Bank Indonesia's one-month interest rate has fallen from around 17 percent at the beginning of the year to around 15 percent currently.

But, global development seems to have started turning things around as the U.S. dollar has bounced back against almost all currencies in the world, including the rupiah. Another negative factor was strong dollar demand from the country's corporate sector to repay overseas debts.

And a heightened political atmosphere here ahead of the Annual Session of the People's Consultative Assembly (MPR) will put the rupiah under more pressure in the weeks to come.

Nellor said an IMF review team had started its mission on Tuesday to review the country's progress in the implementation of economic reform programs.

The IMF is providing Indonesia with US$5 billion in bailout loans. In return for the loans, used to help shore up investors confidence in the country's balance of payments, Indonesia must implement reform measures.

The country has so far borrowed $2.6 billion. The next loan tranche is expected to be worth around $350 million.