Stronger monetary measures urged to curb inflation
JAKARTA (JP): The government should pursue stronger monetary and fiscal measures to control inflation and create more employment to prevent possible social chaos, University of Indonesia economists said yesterday.
Anton H. Gunawan and Sri Mulyani Indrawati said the government should simultaneously solve offshore debt problems, restore the health of the banking sector and reduce various distortions in the production sector to shore up the rupiah.
While speaking at a university symposium on "caring about the future of Indonesia", they said monetary policy alone had lost its effectiveness to control the inflation rate and strengthen the rupiah.
"Monetary policies have become redundant during the current crisis, so policies to control inflation should be more on the fiscal side," Anton said in a paper he prepared jointly with Sri Mulyani.
Sri was not at the meeting yesterday because she is performing a pilgrimage to Mecca.
Anton predicted that efforts to control inflation by raising interest rates to high levels would not be effective because current inflation had been caused more by supply rather than demand factors.
"One thing the government should understand is that the current high inflation rate is not merely caused by high growth of the money supply and economic liquidity.
"The high inflation stems more from supply factors, like imported inflation, the stoppage of production processes and cuts in distribution channels," Anton said
Fiscal measures to control inflation could be pursued by subsidizing the importation of basic staples and maintaining fuel subsidies for some time, he said.
Economist Ari Kuncoro agreed and said the government should subsidize the import of raw materials for the production of basic necessities, including medicines.
"However, all subsidies should be viewed as emergency measures. They cannot be maintained for a medium or longer-term period," Ari said.
"If they are maintained for any longer than that, it would make the economy inefficient," he added.
The economists said the government did not have enough funds for long-term subsidies because domestic income taxes would not increase and could even decrease.
Anton suggested that the government transfer all of the country's non-budgetary funds managed by various foundations under President Soeharto to the state budget.
The government would have more resources to finance its spending, especially on badly needed subsidies, he said.
He said the government could use the trillions of rupiah from the non-budgetary funds to create more employment through a social safety net scheme.
He proposed that the government allocate certain funds, like those used to help undeveloped villages, to create employment.
The government should involve more non-governmental organizations and local people in selecting and running the projects to make them productive, Anton said.
"And most importantly, the decision making process and the use of funds must be made as transparent and accountable as possible," he said.
As for efforts to strengthen the rupiah, Anton suggested that the government simultaneously solve offshore debt problems, restore the health of the banking sector and reduce various distortions in the production sector.
"Therefore, the essence of the International Monetary Fund reform package should cover all three elements because all of the three are vital to the strengthening of the rupiah," Anton said.
The rupiah has lost about 70 percent of its value against the U.S. dollar since early July.
Anton warned that if the government again failed to implement the reforms, confidence in the current administration would never return.
He said the people had already been disappointed by rent- seeking activities hidden behind the State Logistics Agency and managed clove trading, which the government has recently tried to defend in its negotiations with the IMF.
Goodwill from the government to abolish all practices of crony capitalism is needed to win the hearts of the people to restore confidence, he said. (rid)