Wednesday, November 02, 2005

Indonesian inflation of words

In April 2005, Asian Development Bank economist Amanah Abdul Kadir explained with certainty that Indonesia’s inflation rate this year would be 5%, lower than government’s target of 7.3%. The economist argued that world oil price would ease of lower purchasing from China and United States to prevent overshooting and panics.

Few days later Central Bank Governor Burhanuddin Abdullah revised the inflation target back to 7%, well below his previous statement of 8.8% for undisclosed reasons.

The ADB economist and the governor were dead wrong. Less than six months later, in early August, Central Bureau of Statistics (BPS) announced inflation had reached 7.84% (year on year) or 5.09% for calendar year of January-July, and oil price keep increasing well above government’s target of US$40 per barrel.

Based on BPS data, economist from Indonesian think tank Econit then reminded government that the target of 7.3% would be surpassed. Government revised up the inflation target to 8.6% prior to the domestic fuel price hike, while Central Bank moved ahead with its own target of 9%.

When government decided to lift fuel price by average 100% on October 1st, Bank Indonesia responded with another increase in interest rates. The central bank governor said in mid October that full year inflation could reach 14%, well above its previous optimistic target of 12%.

Government was angry on the statement. Economist Sri Mulyani Indrawati, minister for the national development planning said Bank Indonesia was just too pessimistic about the economy. She insisted inflation would be around 12%. Chief economic minister Aburizal Bakrie supported Mulyani saying government would conduct market operation, such a fool statement considering how the market works, and believed inflation pressure from fuel price hike would only 3% at the most to bring the full year inflation at 10%-11%. Finance minister Jusuf Anwar even put 10% as the inflation target for the full year.

Both the governor and the ministers proved to be wrong again when BPS announced yesterday that year on year inflation had reached 17.89% and 15.65% for the fiscal year 2005 (January-October). This is the highest level in the last four years.

What are the government’s responds?

President Susilo Bambang Yudhoyono expressed his concern on high inflation rate through his spoke person Andi Alfian Mallarangeng. Andi said as an economist, the president (earned his PhD in agriculture economy from Bogor Institute of Agriculture) knows exactly how to combat that. But when reporters what policies should be taken, Andi asked them to interview Aburizal.

Confronted by journalists on government's policies to curb inflation, Aburizal came up with reasons only, things that we already knew, no way out. His boss, Vice President Jusuf Kalla, bombarded the whole country with another empty words. Kalla said government guarantee November inflation would be lower or even negative. How Kalla would do that? Guarantee on something that he can't even touch?

Bank Indonesia raised the benchmark BI rate by 125 points to 12.25% to be followed by lending rate hikes by commercial banks. Just like firefighters, BI tried to calm the market with another too early projection of 6%-8% inflation rate next year.

It is not clear whether they had included in the calculation of the possible 30% electricity tariff hike early next year and further increase in fuel price to the international market price. They should do better math first, right?

My conclusion: Even words have their inflation rate too! Government words and promises certainly have been inflated to the highest level in the history.

What about central bank? Well, we might have to move in The Fed Chairman Allan Greenspan after his retirement at least to tell central bank officers to shut their mouth and keep their words inflation-free.

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Blogger Kahlil said...

I Agree. BI & the gov't should stop forecasting inflation. Let us economists do that. Don't take our rice bowl away. BI & the gov't should instead find ways to reduce inflation, and not talk it away. Words from high inflation alone can cause inflation. Beware! And study what Greenspan actually do.

November 06, 2005 11:10 PM  

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