World Economy

Indonesia to Reduce Inflation, Stabilize Currency

Indonesia to Reduce Inflation, Stabilize CurrencyIndonesia to Reduce Inflation, Stabilize Currency

Indonesian President Joko Widodo (Jokowi) has announced a comprehensive package of reforms aimed at reducing inflation and stabilizing the exchange rate, stimulating demand through deregulation and direct support, with a special focus on creating more jobs in small and medium enterprises and across urban and rural communities.

The package, which takes effect this week, is enormous in scope and encompasses many existing government initiatives. It is to be part of a series of packages, so may be only the icing on the cake. But one thing is clear: it is a different package of deregulation reforms from that first announced in the second half of the 1980s, when the economy appeared similarly to be on its knees, NewsNow reported.

Now the focus is on public sector support and increasing demand, rather than improved competitiveness.

The reforms need to be placed in context. Indonesia is not suffering a major economic meltdown. Growth is lacklustre but steady, inflation relatively high but under control and there’s been no major shock to the labor market. But economic growth is slower than under Jokowi’s predecessor Susilo Bambang Yudhoyono and the macroeconomic situation is weaker than when Jokowi came to power almost 12 months ago.

Growth is running at around 4.5%, not the 5 to 6% of earlier years. Annual inflation of almost 7% in August 2015 is higher than almost all Indonesia’s neighbors and trading partners, thus undermining the potential competitive gains from the rupiah’s 12-month depreciation. The fall below 14,000 rupiah to the US dollar in August has reminded people of the trauma of the 1998 Asian financial crisis, the last occasion when the rupiah hit such levels.