Thursday, 24 July 2008

European Luncheon: High commodity prices a problem for Indonesia because of inefficiencies

At the joint European luncheon on 21 May, speakers Enrique Aldaz-Carroll of the World Bank and former Coordinating Minister for the Economy DR. Rizal Ramli, analyzed the impact of the high commodity prices on the Indonesian economy. Aldaz-Carroll expected commodity prices to remain high for the foreseeable future. Both speakers expressed their concern that the inflation that affects the poor is much higher than the official inflation rate. Aldaz-Carroll stated that food inflation in April was 16%, and that this inflation level will push 4.5 million people, who are spending two thirds of their income on food, into poverty. Rizal Ramli expects overall inflation in Indonesia to be in 'double digits' but inflation of prices that are important to the poor to be twice as high. Aldaz-Carroll said that fuel subsidies are not well-targeted and are not really helping all the poor. He also stated that the high oil and gas prices had not led to a substantial increase in oil and gas production in Indonesia because of the poor regulatory investment conditions. Economic growth in Indonesia could be 11% if the investment response in oil and gas would have been unhampered by the investment conditions. Rizal Ramli added to this that Pertamina's production costs per barrel are 25% higher than in other oil producing countries. Transmission losses at PLN are 11%, also much higher than in other Asian countries. Rizal Ramli expressed concern that the planned increase in fuel prices would cause serious trouble, and stated that 'this is not the right time for increases'. He also stated that Bulog's current stocks are less than 40% of the level that is needed to ensure sufficient supply for the poor and to stabilize prices. Therefore, Bulog will be unable to control rice prices in the coming months. He suggested that the Rp 14 trillion that is planned for cash transfer to the poor, would be better spent on infrastructure, most notably the 1300 km trans Java toll road. Less than 5% of this has been built, because concessions have been given to poorly qualified companies who are now waiting for buyers to take over the concession from them. Besides, the government will need to give partial guarantees to private investors.

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