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Energy root cause of sliding rupiah

The Indonesian rupiah has plummeted to its lowest level in the last two decades, forcing the government to step in with measures to reduce the country’s current account deficit.

Rasmus Abildgaard Kristensen (The Jakarta Post)

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Tue, October 2, 2018 Published on Oct. 2, 2018 Published on 2018-10-02T08:48:34+07:00

For some time, the rupiah has been under pressure from the tightening of US monetary policy. (Antara/Puspa Perwitasari)

T

he Indonesian rupiah has plummeted to its lowest level in the last two decades, forcing the government to step in with measures to reduce the country’s current account deficit.

Bank Indonesia has raised its policy rates a number of times this year and the government has imposed import restrictions on both capital and consumer goods.

However, none would dispute that energy lies at the root of Indonesia’s widening current account deficit. More specifically, Statistics Indonesia (BPS) data shows that oil and gas has been the biggest contributor to the deficit, as oil and gas imports amounted to a whopping US$3.1 billion out of a year-to-date trade deficit of $4.1 billion.

The government is working hard to determine an adequate policy response to the pressing challenge of reducing the country’s oil and gas imports. One solution is the new regulation that requires all vehicles to use the B20 biodiesel mix, thereby substituting imported fuel with domestically produced biofuels. This will go some way toward addressing the problem, but more fundamental changes might be needed.