Editorial: Fasting-driven inflation

Wed, 09/03/2008 10:51 AM | Opinion

Abstention is the theme of fasting, but Muslims tend to spend more during the fasting month of Ramadan.

Although Muslims are required to fast -- to abstain from eating, drinking and sexual relations -- from dawn to dusk, they tend to eat more from dusk to dawn. At least, they prepare more delicious meals, with more variety -- and thus more expensive -- for their breaking of the fast.

Aside from foods, Muslims' spending on other goods and services also rises during the fasting month and for Idul Fitri, the end of the fasting month celebration. More people buy new clothes for themselves and for their families and most travel to their hometown at the end of the fasting month to celebrate Idul Fitri with their relatives.

In the end, Muslims simply spend more during the fasting month and Idul Fitri. Because of these higher spending needs, all employers are required by law to pay an extra Idul Fitri bonus to their employees.

Increased demand for goods and services during Ramadan creates economic dynamism. Those working in the food and beverage industry, textiles and garments as well as the transportation sector, directly benefit from this increased demand. Many businesses prosper during Ramadan and Idul Fitri.

Rising demand for goods and services is good for the economy. It drives growth. But, it is worrying that the supply side of the economy often cannot satisfy these sudden, but anticipated, increases in demand.

Because of constraints on the supply side, which cannot adjust easily to sudden increases in demand, the Ramadan and Idul Fitri celebrations traditionally result in higher inflation. The challenge for everyone responsible for economic management is to identify these supply constraints and to help address them.

Last year, there were bottlenecks in the supplies of food related products, especially cooking oil and sugar. As a result prices skyrocketed and this pushed up the consumer price index, and the inflation rate.

This year, we are lucky that international commodity prices are going down and this is reflected in our domestic market, with declining prices for items such as gold and cooking oil.

Despite declining commodity prices, we are especially concerned with the rising prices of cooking fuels -- notably kerosene and liquefied petroleum gas (LPG) -- as a result of supply scarcities.

Many attribute such scarcities to the government's aggressive kerosene-LPG conversion program, which has met strong opposition from kerosene traders, who have in the past made huge profits from trading kerosene -- including by selling some of it to industrial users at much higher prices.

As the government is phasing out kerosene in some localities, so demand for LPG is rising. Supplies of LPG and LPG gas bottles from state oil and gas company Pertamina cannot yet keep up with this increasing demand. This results in higher prices for LPG in the market place.

Worse, Pertamina has unilaterally decided to increase the official price of LPG in the 12-kilogram LPG tank which is widely used by middle-income households.

Although this proposed increase has met strong opposition from members of the House of Representatives, this plan to increase LPG prices is already imprinted in public perception. Inflation often results from such public impressions (even before this decision is finally made).

To dampen tendencies towards higher inflation, it would be wise for the government to intervene and determine whether or not Pertamina has the right to increase LPG prices. Also, government needs to slow down the speed of implementation of its kerosene-LPG conversion program, especially during the fasting month and Idul Fitri.

To prevent inflation from spiraling at this time, it is important for the government and the central bank, to manage public perceptions and expectations on inflation.

The government needs to assure the public that it will keep utility prices in check. The central bank, on the other hand, needs to address inflation from the demand side, by restricting the supply of money and managing the base interest rate.

Considering that year-on-year inflation as of August had reached 11.85 percent and year-to-date inflation has already reached 9.28 percent, we expect that the central bank will again raise its benchmark rate from the current 9 percent.

But we also warn that the central bank's grip on interest base rates should not be so tight and punitive as to deny oxygen to basic economic activity.

Let the fasting month and Idul Fitri create demands and help make the economy prosper, but please can the government and the central bank work harder to keep the rate of inflation in check.

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