Beating Back Inflation

INDONESIA - Report 27 Jun 2013 by Cyrillus Harinowo and Maria Kartika Purisari

Executive Summary

On June 21, the government finally announced the increase of domestic fuel prices in Indonesia, a decision that had been in the works for months. The decision is crucial for lowering the government budget deficit and achieving a better balance of payments.

The rise of the domestic fuel price had increasingly become a source of speculation, which led to rising inflation and inflation expectations. Currently the Organization of Road Transport Companies has proposed a 30% rise in their tariffs, which led the Minister of Transportation to find ways to soften demand. At the same time, prices of food, textile and clothing and other commodities have continued to rise in the past few weeks – a phenomenon that will be reflected in the CPI in June and July.

The process of revising the Government Budget was conducted in stages and in a transparent process. Once the government completed the process in parliament in the form of the agreement on the Revised Budget 2013, the last hurdle that prevented the president from making the tough decision to hike fuel prices was removed. However, the announcement had to wend its way through the bureaucracy. For many people, the wait seemed to go on forever, which led people to believe that the president had insufficient courage to implement the decision. However, the government argued that it had to follow the democratic process.

In light of the fuel price hike, the budget deficit is now projected at 2.38% of GDP, 10 basis points lower than the previous prediction. The government is supposed to increase subsidized gasoline from Rp.4,500 to Rp.6,500 per liter. At the same time the subsidized diesel oil will be increased from Rp.4,500 to Rp.5,500 per liter. However, as previously, the Ministry of Finance is also preparing measures to discourage excessive spending. So the budget deficit may fall further: we predict it will come in slightly under 2% of GDP.

In anticipation of the rise in inflation, Bank Indonesia has just launched two preventive measures. It raised Central Bank overnight deposit rates, also known as FASBI, from 4% to 4.25%, and the next day raised the BI benchmark rate, from 5.75% to 6%.
In April, the trade deficit was also significant. Apparently the government is looking at a long road ahead if it wants to steer trade balance back to surplus.

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