NEWS

In the draft revised 2016 State Budget, the government cut the amount of inflation from 4.7 percent to 4 percent. These cuts are the impact of low inflationary pressures. The realization of inflation in calendar year 2016 (January-March) was only 0.62 percent with annual inflation (YoY) of 4.45 percent.

The low inflationary pressure cannot be separated from the government's policy of reducing fuel prices (premium and diesel) twice (January and April), decreasing basic electricity tariffs (TDL), and reducing transportation costs.

Low and controlled inflation will have a positive impact on the economy. Low inflation will make the purchasing power (consumption) of the community, especially the lower classes can be maintained so that it is expected to maintain the vitality of economic growth. This happens, considering that consumption is the backbone of Indonesia's economic growth with a contribution of around 55 percent to the Gross Domestic Product (GDP).

Low and controlled inflation will also strengthen product competitiveness in the global market. Competitiveness results from productivity. However, for this productivity to be sustainable, low and controlled inflation is needed. Unlike some countries that encourage the competitiveness of their products by manipulating the exchange value.

Not only that, low and controlled inflation will become an anchor for the monetary authority (Bank Indonesia / BI) to direct the policy of interest rates.

The controlled inflation throughout the first quarter of 2016, made BI implement a monetary relaxation policy. During the first quarter of 2016, BI cut interest rates three times by 75 basis points (bps) from 7.5 percent to 6.75 percent.

In fact, if inflation can be directed to the target level (target), then the opportunity for the BI Rate to be cut again remains open, moreover this is supported by the stable exchange rate of the rupiah, the current account deficit (DTB) that is controlled, and easing the aggressiveness of the US Central Bank ( The Fed) to raise its benchmark interest rate (federal funds rate).

With this reduction in the BI Rate, it is hoped that this will drive down bank lending rates. As a result, it will have an impact on lowering the cost of funds (cost of funds), which in the estuary will further open access to finance for the business world.

However it must be recognized, one of the obstacles that made the expansion of the business world stagnate, especially the micro, small and medium business sector (MSME), is a high loan interest rate. Business expansion is needed to accelerate economic growth.

Challenge

Although the inflation condition so far is still relatively low and under control, it cannot be concluded as an achievement. The management of Indonesia's inflation in the future will still be very challenging and require hard work and strategies to deal with it. There are at least three challenges that must be faced.

First, there has not been any significant improvement to the structure of the Indonesian economy, especially the limited capacity of the industry that acts as the supply side.

This limitation will make the economy overheating easily when economic growth is driven to a high level.

The impact will disrupt the external balance (current account deficit) which will ultimately disrupt the internal balance, namely the pressure on the exchange rate and inflation. Under these conditions, the monetary authority will raise interest rates and the impact will slow economic growth.

The solution to overcome this supply-side limitation is to increase investment. However, in order for this investment to be entered in, a number of conditions are needed, such as a conducive investment climate, infrastructure support, regulatory certainty, professional biroraksi, and easy and inexpensive financing access.

So far, all these conditions have not been fulfilled perfectly. The government already has 11 series of economic packages and the sequel is a guide to provide these conditions. Unfortunately, not all of these economic packages are easy to implement in the field. Coordination and evaluation problems are often obstacles.

For this reason, while perfecting the implementation of the entire economic package, the government must remain consistent in accelerating the development of infrastructure that has gone so far.

However, with the condition of Indonesia as an archipelago country, the availability of infrastructure is a must.

The presence of infrastructure will create connectivity (connectivity), thus making distribution (transportation) and logistics costs down. This will have a positive impact on the falling prices of goods. The availability of infrastructure will make the gap between the western part of Indonesia (Java) and Eastern Indonesia (Papua) even smaller.

Second, controlling food prices. So far, food price volatility has not been resolved. This can be seen from 2015. Although, inflation is relatively low and prices of food commodities in various countries have been slowing down, price pressures in Indonesia still persist. Throughout the first quarter of 2016, this was still happening.

Ironically, when the harvest occurs, the price of rice remains high. That is, something is wrong. This must be solved. However, food is a basic need whose availability and price must be affordable to all levels.

Third is the price of energy. Low world oil prices are a blessing in disguise in the current Indonesian economy. The government can reduce fuel subsidies significantly, without causing significant inflation turmoil.

The problem is, what will happen when world oil prices rebound. This is a problem. Admittedly, BBM provides quite effective in triggering high inflation.

Reflecting from the past, inflation can be controlled, although high world oil prices cannot be separated from the large subsidy allocation for the energy sector. This subsidy undermines the state budget and makes the state budget helpless to fund productive sectors.

Therefore, in the midst of this low oil price momentum and the government is no longer providing large subsidies to the energy sector, it must accelerate the conversion of oil to gas, gas city development, encourage increased mandatory biofuels, accelerate production and commercialization of new and renewable energy, and accelerate the availability of mass transportation facilities and infrastructure.

Of course in the short term, the Regional Inflation Monitoring Team (TPDI) must continue to be strengthened and improved in quality. However, since the inflation problem is largely influenced by the supply side, good coordination and cooperation between various institutions at the central and regional levels is important to control inflation.

Written by: Desmon Silitonga-Analyst PT. Capital Asset Management