BI sees inflation risk in high oil prices

The Jakarta Post , Jakarta | Wed, 10/31/2007 4:45 PM | Business

The Jakarta Post, Jakarta

The central bank has warned of another risk to the economy from surging global oil prices besides a possible increase in fuel-subsidy spending, namely, a likely pick-up in inflation over the long run due to the rising cost of imported goods.

The business community has also acknowledged the risk, and requested some slack in terms of the prices, and taxes imposed on, unsubsidized fuels to help keep increases in production costs -- and overall inflation -- to a minimum.

Bank Indonesia senior deputy governor Miranda S. Goeltom said that though Indonesia could set off a possible increase in fuel-subsidy spending through higher exports of its commodities, such as coal and palm oil -- the demand and prices for which have also been rising -- such a situation would be unsustainable in the long term.

""In the short run, Indonesia could gain through higher revenues, trade account surpluses and foreign exchange reserves, despite a rise in subsidy spending,"" Miranda said Tuesday during an event discussing the economic outlook.

""However, the second-stage effects might not be so favorable. This is because Indonesia still imports many goods as well, including those produced from the commodities.""

If the prices of raw materials and alternative fuels for production, as well as the end-products themselves, rose, then consumer prices would also be affected.

As a result, the economy could in the long run come under more pressure from ""imported inflation"", which would eventually have an impact on BI's monetary policies.

""So, I think we have to be cautious. We're confident that next year's economy will be better and inflation lower, but caution must still be exercised due to the many uncertainties arising from external factors,"" Miranda said, adding that BI was still standing by its forecast for inflation of between 5 and 7 percent this year.

BI Governor Burhanuddin Abdullah had previously said that the recent strengthening of the rupiah could act to help counterbalance a possible pick-up in ""imported inflation"".

However, the rupiah weakened to Rp 9,110 against the U.S. dollar Tuesday, while crude oil prices eased slightly to $92 a barrel in New York and $89 in London.

In light of the current situation, Indonesian Association of Food and Beverage Producers (GAPMMI) chairman Thomas Dharmawan has asked that the possible risks of increased imported inflation be shouldered together, and not just left to producers.

""If possible, the government should cut the taxes on unsubsidized fuels for commercial use, and not increase their prices,"" he said.

""It would also be helpful in keeping production costs down by ensuring sufficient energy supplies for the domestic market, and not exporting them all just for windfall revenues.

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