Aditya Suharmoko, Jakarta – While the global economic slowdown is not expected to greatly affect Asian economies, Indonesia's biggest challenge lays in subduing its inflation rate to protect public purchasing power, a discussion concluded Wednesday.
"Indonesia's biggest challenge is probably in keeping inflation rate under control in light of increasing commodity prices," Singapore-based Citigroup economist, Moh Siong Sim, said on Wednesday.
Over the past several months, Indonesia's has experienced a spiraling in price of key commodities, including rice, soybean, wheat, flour and cooking oil, accelerating an already hasty inflation rate.
Sluggish agricultural growth has caused companies to import foodstuff, forcing them to pay skyrocketing global prices, which in turn have driven up prices of foodstuff produced locally. "Rising food prices can cause riots because poor people are unhappy," Sim said.
On average the poor spend about 60 percent of their income on foods, according to macro-economic planning director of the National Development Planning Agency, Bambang Prijambodo.
Bambang said the government would strive to reduce inflation by stockpiling key commodities to help maintain stable prices.
He said the government would opt to provide hefty fuel subsidies, rather than raise fuel prices, in a bid to maintain public consumption power, the country's main source of economic growth. "We have decided to keep fuel subsidies in place in order to maintain consumption power and to ease inflation," he said.
The government is proposing fuel subsidies reaching Rp 130 trillion (US$14.16 billion) for a revision of the 2008 State Budget, almost three times higher than the Rp 45.87 trillion allocated in the current budget, based on an oil price assumption of US$95 per barrel.
Sim said in light of inflation worries, the central bank was unlikely to lower its benchmark interest rates. Lower rates are needed to propel banks to channel affordable loans for the expansion of the corporate sector.
"We expect Bank Indonesia's rates to remain steady throughout the year," said Sim. Currently, the central bank benchmark interest rate stands at 8 percent, while the US Fed rate is at 2.25 percent.
Sim said maintaining a favorable rupiah exchange rate against the US dollar was another way to stave off inflation. Bambang and Sim estimated the rupiah would hover between Rp 9,000 and Rp 9,200 per dollar this year. "A stable currency will ease inflation expectations," said Sim.
Citigroup have forecasted Indonesia's economy to grow by 6 percent this year, with inflation estimated at 7 percent. Last year the Indonesian economy, the largest in Southeast Asia, grew 6.32 percent, while inflation reached 6.59 percent, according to the Central Statistics Agency.