Single digit inflation still possible, says IMF

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.