Europe and the United States were having a hard time dealing with the spike in demand after COVID-19 restrictions were lifted, but Indonesia had “a way to deal with potential high inflation,” he said on Thursday, speaking in a panel discussion at The Indonesia Summit 2023 held in Jakarta by MUFG Bank along with its subsidiaries Bank Damanon and Adira Finance.

He elaborated that Indonesia’s central bank was not left to fend for itself, noting, “The government has its own role [to play] when [it finds] that there is potential inflation coming from [commodities with] volatile prices or from administered [prices].”

Bambang, who served as finance minister from 2014 to 2016 during the first term of President Joko “Jokowi” Widodo, commended the government for its use of the state budget as a “shock absorber” to subsidize administered prices.

Anti-inflation tools 

He added the government had instruments to address inflationary pressure from volatile food prices, namely the State Logistics Agency (Bulog) as well as the Trade Ministry’s direct market intervention.

“You cannot expect such an operasi pasar (market operation) to happen in the US […], because in the US and in the EU, it’s all [based] on market mechanisms. That’s why the only ammunition from the US and EU perspective is the central bank.”

A resident carries a box of groceries during a subsidized market day at Sleko Market in Madiun, East Java, on Oct. 30, 2022. The East Java administration sold rice at Rp 52,000 (US$3.34) per kilogram, cooking oil at Rp 12,500 per liter and sugar at Rp 12,000 per kg amid global and domestic inflation pressures. (Antara/Siswowidodo) (Antara/Siswowidodo)

In an attempt to curb demand, the European Central Bank and the US Federal Reserve would keep increasing interest rates, he added, even though “the real problem, unfortunately, is not on the demand [side], because […] a spike in demand is unavoidable […], while the supply side has difficulty in catching up.”

A combination of subsidies and direct social assistance was the key for Indonesia to respond to ongoing monetary tightening in the West, said Bambang, who cochairs the Think 20 (T20) initiative in the Group of 20 forum currently led by Indonesia.

The other panelists charted a similarly proactive path to recovery for the domestic and regional economies.

The government’s war on inflation has gone as far as banning the export of crude palm oil in a move to bring down the price of cooking oil in the domestic market. The move rattled global markets and hurt local farmers earlier this year, before shipments were allowed again.

Read also: Palm oil export ban will hurt us, farmers say

Government officials have taken to being photographed at traditional markets, factories and supermarkets in a demonstration of their dedication to identifying supply chain bottlenecks and cracking down on alleged market manipulation.

Hands-on approach

Masyita Crystallin, special advisor to the finance minister on macroeconomic and fiscal policy, pointed out that the government was offering a fiscal incentive to get regional administrations on board with its proactive approach to price pressure.

“So those who can maintain their regional inflation below the national average, they get additional transfers from the central government,” Masyita said, speaking at the same panel discussion.

Even Bank Indonesia is proving far more creative than relying on monetary policy alone to contain inflation. The central bank has been far more hands-on than its counterparts around the world when it comes to price controls, announcing in August a “national movement” to push food inflation down.

Read also: BI tries new ways to keep food prices under control

The effort was as simple as working together with local administrations to plant chili seeds and help set up greenhouses and digital-farming infrastructure.

Cost pressure on manufacturers

Shinta Kamdani, CEO of the Sintesa Group and deputy chairwoman of the Indonesian Chamber of Commerce and Industry, seized the opportunity to reiterate that companies in the country still needed authorities to create a favorable business environment, such as through subsidies and measures to buttress domestic purchasing power as well as to keep credit affordable.

While high global commodity prices were helpful for some Indonesian export industries, Shinta believed this would also bring difficulties. “It will be detrimental to Indonesia’s manufacturing industry performance […] because we still rely a lot on imports of commodities as production inputs, such as in food and beverages [and] pharmaceuticals,” she said.

At the same time, a slowdown in key export markets would reduce demand for Indonesian manufactured goods, warned Shinta, who chairs the Business 20 (B20) subforum in the G20 framework.

Borrowing costs are also rising in Indonesia, which will impact many companies, she explained, adding that excessive wage hikes in some regions were “definitely detrimental” as “labor-intensive industries were already facing many issues. […] I think in shoes and textiles, we’re already looking at a [reduction] of 50 percent in demand, and this will definitely [have an] impact.”

Economic headwinds

While Shinta, the Finance Ministry’s Masyita and former Cabinet minister Bambang all pointed to headwinds ahead for 2023 as Indonesia faces high inflation and a global slowdown, all agreed that the domestic economy was in a relatively strong position to weather the storm.

The fourth panelist, Hiroshi Watanabe, president of the Tokyo-based Institute for International Monetary Affairs concurred.

While some money was flowing out of ASEAN back to the US as a result of the Fed’s tightening policy, plenty was also staying, Watanabe noted. 

He pointed to specific economic difficulties that were troubling other parts of the world in addition to the shared problems of rising prices and slowing growth, namely the trade war between the US and China, the energy shortage in Europe, backfiring sanctions hurting both Russia and the West and a housing market downturn in China.

“This year, I believe, the Chinese growth rate is less than 3 percent, and the average ASEAN countries’ growth rate is more than 3 percent. So, the Chinese growth rate is lower than the ASEAN growth rate. This is the first time in the last 15 years [for that to happen],” Watanabe said, adding that a further slowdown in China could have a very negative impact on ASEAN, Japan and Korea.