Caution is Still the Best Word
By: Prof. J. Soedradjad Djiwandono, Ph.D., Emeritus Professor of Economics, Faculty of Economics and Business, University of Indonesia
Independent Observer – (19-25/11/2021) Recently the US news has been full of cautions addressed to the Biden Administration, both in terms of managing their agenda along with a strong warning from the business community, pointing to the danger of high inflation, which looks to be not simply a temporary phenomenon but one that will persist until at least 2022. Even though the picture has yet to clarify, the 2021 consumer price index which would indeed reach 6.2 per cent, promises to be the highest inflation rate that the US has experienced in 30 years. Some observers figure that cannot be ignored, both economically as well as politically, especially for the Democratic Party that just suffered a humiliating defeat in the governor’s election of Virginia, whereby the Democrat incumbent Governor Macullife lost to a novice Republican candidate called Youngkin. The other one was the surviving incumbent Democrat Governor Phil Murphy of New Jersey, who won the election in a neck and neck competition against the Republican candidate.
What has recently happened has put President Biden in a more defensive place, first with respect to his comment previously regarding inflation, which he felt the need to correct by admitting that high inflation would not just be a temporary phenomenon. He was further under pressure to reevaluate his agenda on both the infrastructure bill as well as the social expenditure bill.
We had better take the matter into account very seriously, to see the possible implications for emerging economies, including that of Indonesia. Maybe we should be more prepared for a possible effect that may manifest sooner than later: a possible increase in the Fed fund rate. Such a rate increase must be answered with our own BI rate, by how much and when I am sure BI has already concluded its calculation.
Next in line for sure is the impact on the budget. With a tax ratio of less than 12 per cent, Indonesia’s fiscal space is indeed narrow. This is on top of the already high ratio of the national debt to GDP. I will not hesitate in reiterating that we cannot use a normal ratio of 60 per cent, even if at present it is still lower than that the fact that some state enterprises, like Garuda and PLN, are considered “too big to fail”, implying that the government must look for another source of financing, now most likely with higher interest rates.
So far BI still has a wider space to move in, as when the government financed increasing expenditures for Covid-19; it may still have some space to increase quantitative easing. But, for how much and how long? For sure BI room for maneuvering is no longer as spacious as previously, to say the least.
I do not intend to cry “Wolf!!” nor be overly pessimistic about the latest developments of the US economy and their potential impact on Indonesia; however, I would like all of us to be prepared, should global conditions worsen post-pandemic: we are not even sure as to whether (as some argue) Covid-19 will revert to an epidemic rather than staying a pandemic.
I think I would like to ask everyone to praise the Lord that we Indonesians are not as divided as US society appears to be at present; it is thus easy to accuse the other side of being unpatriotic, too easy to believe in fake news, alternative facts or baseless rumors, while easily believing in liars and information without any basis. Frankly, I see US society at present in disarray, intentionally rudderless since they do not want to accept reality, even common sense.
FINAL NOTE
At this point this short op ed is just my means of continuing to be in communication with Independent Observer readers, who I missed for months, due to my own fight with a urinary infection and my problems with both knees and right thigh. I still must deal with the right thigh problem, but my knees are all right, thanks to the care of my doctors and nurses who did their best to help me. I am still under the care of a trainer in hydrotherapy and physiotherapy, while waiting for better and proper treatment for the right thigh. I am sure I will find a solution. With that, I am confident I can appreciate what “quality of aging’ refers to.
Ok, as for the intention of this op ed, I would of course hope that policymakers in BI and the Ministry of Finance will indeed be on guard, be prepared and ready to make necessary moves in both institutions respectively; when and by how much should BI rates be raised, how the Ministry of Finance should take necessary steps to make a longer-term move of raising the tax ratio, increasing the tax base and streamlining social expenditures to reduce inequality and abolish poverty. I hope no one will reject what I chose as the title of this op-ed: “Caution is still the Best Word.”