The world seen with slanted eyes: monetary policy class in Indonesia.

Volunteers Blog

Denpasar, Bali, November 2014 (Stefania Sechi)

On October the 20th 2014 Joko Widodo, or Jokowi, became the seventh President of Indonesia. He is the second-one directly elected by the population since Indonesia’s independence in 1945. After Suharto military dictatorship between 1968 -1998, that leaved behind him a deep-rooted trail of corruption, Indonesia introduced in 1999 democratic elections and in 2004 it chose for a direct popular electoral system. Jokowi is also the first Indonesian president who does not have a military background.

The new president promised a lot: to fight the corruption in the public system, to keep the annual 7% growth of GDP, to reduce the huge deficit of US$28,34 billion1 in 2013, to provide the population infrastructure, health care and education.

You should know that Indonesia last year spent $23 billion (one fifth of the national budget) only on fuel subsidy. Since the Country import a lot of its fuel this also effects the nation’s trade imbalance (which is total exports – total imports). Jokowi decided to reduce the budget deficit and he is doing so by reducing the subsides on the fuel. Also he wants to redirect the savings to education and social-welfare programmes.

And so the Bank of Indonesia started with his job. I studied economics; last November in Indonesia was super-interesting for me, it was like a 4D monetary policy class. That is briefly what happened:

Bank of Indonesia rise the monetary rate change
The Bank of Indonesia rise the price of rupiah. At the beginning of November 2014 1 US$ was equal to 12.267 Indonesian rupiah. In the end of November 2014 1 US$= 12.183 rupiah. Now the Indonesian money costs more, with one dollar you can buy less rupiah than you could buy in October.

What are the consequences of this move?

Well, a macroeconomic manual says that prices should go down. Since the money now it’s more precious, an Indonesian is going to need less money to buy his nasi goreng for lunch. Unfortunately in the real world it is almost impossible to rise down the prices, for that reason the price of nasi goreng didn’t actually go down. At the opposite, it’s really easy to make the price rise: this process is called inflation. The central bank can only try to keep the inflation low by using monetary policy, as the Bank of Indonesia did in November.

Few days later the government rise the prices of fuel
The prices were raised by 2000 rupiah, which is the 30% of its cost. The gasoline cost is now 8.500 rupiah per liter (about 0,5 €… still cheap) and diesel 7.500. Such a move is always unpopular and caused protests in Jakarta, even though Jokowi affirmed that 8 billion US$ will be saved and, hopefully, smartly invested in services for population sustainment. But let’s stay focused on the consequences of the fiscal reform in our Indonesian daily life.

As soon as the fuel price raised, all the prices raised as well, fostering the inflation. Jokowi knew that, for that reason before changing the fuel price he changed the exchange rate. When the Bank of Indonesia raised the exchange rate, it was trying “to ensure that inflationary pressures remain under control and temporary, after the subsidized fuel price hike”2. As result of the two moves (both monetary policy and cut of fuel subsidy) the government wants to push the inflation rate to 7,3%, and keep it at this rate. Having a cheap money is a big advantage for Indonesia, because cheap prices attract foreigners who want to invest their money in Indonesia; also low costs of production keep the exports high, which is also good. In other words, inflation, when is under control, could be beneficial for the economy. But inflation is not good for people’s pockets and for the volunteers ones neither.

Let’s try to calculate the inflation rate by seeing how the prices changed so far. Specifically the fuel subsidy cut affected our bellies: the food prices raised everywhere! The formula for inflation rate is simple:

Inflation = formula

As you can see food here is still pretty cheap, but the inflation rate in Raya Pemogan, the street were we EVS live, seems to be much higher than in Jokowi prediction



PS: Dear brave readers who arrived at the end of the post, I know that the Indonesian Statistics Institute in this instant is working hard to measure the real inflation rate, and that the small sample with my favorite food is not big enough to explain the price raising in the whole Indonesia. However I enjoyed to collect my little data, so, please, forgive me!

1 Source: Bank of Indonesia
2 Bank Indonesia’s Policy Mix responds to Government Fuel Subsidy Reform Policy, 18/11/2014