Friday, 16 January 2015


BI’s policy to increase benchmark rate by BI rate by 25 bps to become 7,75% on November 20 last brought pressure to businessplayers and the banking sector. Increase of BI rate was in response to oil price increase.

Companies were burdened by heavier production cost as oil price was increased on November 18 last. The Ministry of Finance stated that to increase of oil price was inevitable to support APBN state budget.
Understandable because oil subsidy was a wrong policy to adopt. It had negative effect on state budget’s structure, the Government needed fund for building infra structure.

It would be the right step of the Government built infra structure for the sectors of agriculture, maritime and energy. To control poverty, the Government was promoting social aid through distribution of Indonesia Smart Card, Indonesia Healthy Card and Indonesia Prosperous Family Card.

One thing was sure oil price increase had its impact on Indonesia’s economic outlook. In the next 3 months there was going to be additional inflation of around 2% plus 1.5% all through next year this was inclusive of BI’s factor who had increased benchmark rate by 7.75%.

BI must have a forecast of the ensuing inflation and a scenario for tackling it. Oil price increase had caused economy to suffer from cost-push inflation; this was related to increasing production cost due to increasing price of raw materials.

Fast moving cost push inflation could cause economic growth to slowdown, which if in continued it could lower people’s welfare level significantly. Economic growth would no longe be inclusive and sustainable.

Increased oil price would reduce people’s purchasing power. Consequently economic growth in terms of household consumption would be corrected. Application of the “wizard card” system could not be fully effective as price was higher than buying power.

If inflation was under control, it would be easy for BI to troubleshoot by monetary policy, but if inflation was beyond expectation due to increased world’s oil price, then monetary approach alone would have no effect on inflation control. In that case BI must coordinate with the Government to better the supply side. BI and the Government were advised to apply the monetary-fiscal policy.

In the short run, increase oil price would drive inflation up, suppress people’s purchasing power and reduce household consumption. Jokowi-JK expectation to attain 7% economic growth in the 2014-2019 period would have to face challenges. To set growth target of 7% growth, the investment needed was Rp5,500 trillion

Under the present circumstance, President Joko Widodo needed support of all the people including the political elite. The KMP Coalition Group and KIH Coalition Groups should better reconciliate and combine forces.
Noteworthy was ex Finance Minister M Chatib Basri’s opinion who said that now was not the time for Indonesia to aim high in economic growth. All effort must refer to the actual fundamental economy.

The point was that Indonesia’s economy was in the state of uncertainty. This was made worse with the world’s economy which was not fully recovered. Even China was having economic slowdown and this would have its effect on the merging markets.

According to Chatib, the world’s economy was having economic slowdown. The world’s unending crisis had its impact on the emerging markets and not impossible also Indonesia.

However, growth target of around 6% - 6,5% must still be pursued for the next 2 – 3 years because it would have ,multiplier effect especially in opening employment opportunities. The only thing was that economic strategy must focus more on the tradeable sector rather than the non-tradeable.

The consequences of focusing economic strategy on no-tredeable sector was difficulty to reduce poverty. Low quality economic growth was visible in widening income index where the latest position was 0.41 in 2013.

The portion of constructive poverty reduction budget was still extremely small which was apparent in the inclusion of state’s capital to support the Credit Program for Small Business [KUR] amounting to Rp.2 trillion through 2011 – 2014.

It was undeniable that poverty solution fund in the State Budget over the past 5 years had been constantly increasing and by end of 2013 it came to Rp503.2 trillion but over that same span of time population of the poor was only reduced by 3.1% on the average.

The year 2014 and 2015 were the year of economic consolidation where BI and the Government agreed to prioritize economic stability instead of growth because of high inflation and deficit in current transaction. (SS)

Business News - December 3, 2015

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