The high cost of living: Continued price increases undermine the people’s confidence

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(illustration: IO/Agung)

IO, Jakarta – The public is struggling under a burden of continued increases in prices of basic necessities. For example, chicken eggs have shot up 40%, from Rp 21,500.00/kg in January 2015 to Rp 30,000.00/kg in August 2018. Live chicken prices increased 38%, from Rp 29,000.00 for each 1-kg whole chicken in January 2015, to Rp 40,000.00 for each 1-kg whole chicken in August 2018. Not only basic foodstuffs – electricity fees have also jumped significantly, since the Government decided to stop subsidizing electricity for 19 million household users with monthly 900 Volt Ampere (VA) or higher, starting January 2017. The cancellation of subsidies jacked up electricity prices by 100%.

Continued weakening of the Rupiah further impairs Indonesian economic progress. In early 2018, the Rupiah exchange rate to the Dollar was Rp 13,500.00. Now, according to exchange rate data from Bank Indonesia’s Interbank Spot Dollar Rate (Jisdor) on 30 July 2018 it hit Rp 14,409.00 per US dollar. This is a stark picture of how Jokowi’s Government has apparently been unable to defend the welfare of the people.

Economic Inefficiency
Anwar Nasution, Senior Economist and Professor at the Faculty of Economics of the University of Indonesia, judges the micro-economy during the Jokowi Era as “inefficient”, which results in exports remaining stagnant. The prices of basic necessities increase because unbridled corruption persists in driving prices upward. An increase in the price of meat implies that transportation facilities remain inefficient, unable to bring excess beef produced on Sumbawa Island to Java. Domestic rice production is insufficient, forcing imports from foreign countries – which must naturally be paid for with foreign reserves. Here is the irony: foreign reserves exist when exports go well, but exports are stagnant. “Similarly, egg production is closely related to chicken feed. We still import feed, so that prices rise when the Rupiah weaken, because of increased import costs. Egg prices rise because our farms are inefficient, and cannot compete equally with those in Australia or India. Transportation costs are also exorbitant,” Anwar Nasution complained.

Ahmad Heri Firdaus, a Researcher from the Institute for Development of Economics and Finance (INDEF), explained that micro-economics is under heavy pressure. The micro sector includes, among others, farming, mining, manufacturing and processing industries, along with both financial and non-financial services. Industry is in fact the biggest contributor to the total Indonesian economy. The farming sector is the main contributor for laborers at 30%, and industries sector follow at 15%.

The farming and industries sector are under increasing pressure from all sides: the price of everything, starting from production costs to materials, continues to increase. Imported materials become even more expensive because the Rupiah weakens. As for labor issues, the Provincial Minimum Wage (Upah Minimum Provinsi – “UMP”) increases every year, but complaints about labor productivity persist. “Some sectors still find it difficult to obtain energy, such as electricity and gas, especially industries that use gas in their production because gas prices tend to be high. Our electricity fees are also steep, and there are complaints that the price does not match the quality because brownouts frequently occur, especially in the regions. This impairs production stability. That is some of the pressure we face. Then we have such high logistics and transportation costs, not to mention taxes. When any of these items increase, industry cost structure will also rise. It’s hard to sell products, whether domestically or for export, because we have so many competitors from industries in other countries, such as China, Vietnam, and Thailand, ones who can provide the same goods and the same quality at a lower price. This is what I mean by pressure from all sides. This is what we need the Government to help us with, to help entrepreneurs to innovate so that they can resolve these issues,” Ahmad said.

Meanwhile, Lana Soelistianingsih, Economic Observer from the University of Indonesia, feels that there are 4 micro-economic issues that have come to the fore during the Joko Widodo era: food security, energy security, infrastructure, and maritime economics. However, the only issues truly being prioritized at present are infrastructure and maritime economics. There is still a huge volume of food imports. This is the Government’s way to resolve issues with short-term solutions. However, basic necessity prices increased after Eid-el-Fitr because demand sagged. In response, the Government also loosened control of basic necessity prices to keep them from being too volatile. This is because imports imply the spending of foreign reserves, which will pressure the Rupiah. This is why the Government should reduce imports of necessities – to reduce spending of foreign currencies, as this further weakens the Rupiah.

“The Government must maintain a good measure of its own capacity, so that the timing for imports is matched according to needs. During Ramadan and Eid-el-Fitr, the Government imported goods because it did not want basic necessity prices to spike, but after Eid-el-Fitr the Government should back off on control by reducing imports, because its income from the State Budget is limited. Furthermore, the Government should reduce imports in the effort to lessen pressure on the Rupiah. If the Government continues to import actively, the Rupiah will continue to weaken,” Lana Soelistianingsih warned.

Anwar Nasution said that the current weakening of the Rupiah is caused by bad fiscal policies. The State Budget is constantly in deficit and debts to foreign countries increase. During the New Order, debts were soft (no or low interest), but now the interest rates on loans are very high. “The Government borrows money from China and sells Government Bonds, because tax income does not rise sufficiently. Indonesia’s tax income should be 20% of our Gross Domestic Product (GDP), but we have only reached half of that now. This is why Indonesia is deep in debt,” he said.

Imports and Expensive Prices
Hermansyah Siregar, Economic Observer from the Bogor Institute of Agriculture (Institut Pertanian Bogor – “IPB”), said that food necessities are still imported because we still do not have the ability to produce them ourselves. Imports from nations with a high exchange rate would damage the value of the Rupiah.

“About 30% of our beef is imported. With the current exchange rate, it is difficult to push the price lower than Rp 100,000.00/kg, while the Government wanted the price to remain at Rp 60,000.00/kg. With the continued weakening of the Rupiah exchange rate getting meat prices lower than Rp 100,000.00/kg becomes even harder. 90% of our garlic also comes from imports. Rice imports are not too big, because it is solely to maintain reserves. Of the food necessities we have, the biggest import is wheat flour because we cannot produce it ourselves. After wheat flour, sugar imports are also quite big – about 40% of our needs. We already produce chicken independently, but chicken prices continue to increase, because feed such as soy pulp is imported. Furthermore, we need electricity to care for animals. The increase of electricity and pulp prices cause chicken prices to increase as well. So we have to see whether we still have imported components. We also produce eggs independently, but that still depends on electricity, whose tariffs continue to increase. Similarly, transportation costs increase, so that egg prices rise. This is what we need to anticipate from the start, in order to ease the burden for lower-class households,” Herman Siregar advised.

Ahmad Heri Firdaus said that the high price of chicken and eggs is caused by supply problems. The flow of goods to the market is not smooth. This causes the price of goods to increase. This problem is worsened by the fact that most of our feed is imported. Its price becomes more expensive because the Dollar strengthens. This is an indirect impact, because expensive livestock feed means high production costs, meaning steep prices at the market.

Anwar Nasution said that it is normal for prices of basic necessities to increase during Eid-el-Fitr. Basic needs increased during the religious holiday periods, as people host celebrations and feed a lot of guests at home. However, what is wrong is when prices refuse to come back down when the extra need ends. The cause is that production does not increase after the Eid: the Rupiah continues to weaken, so that price of imported goods become even higher. The whole thing is connected from one end to the other. What we need to do is increase production, improve Rupiah value, and improve efficiency – which takes time.

The main issue here is that there are no policies regulating how to boost exports and how to increase domestic efficiency. For example, Indonesia is the biggest sender of hajj and umrah pilgrims to Mecca in the world. Yet at the Holy Land, the Indonesian hajj and umrah pilgrims wear ihram clothing made in China. The wonder is why the Government does not oblige all hajj and umrah pilgrims to wear domestic products when they go do their Holy Pilgrimage. Similarly, Indonesian businesses can provide food, accommodation, and a lot of other things for their pilgrim countrymen. We should encourage this to obtain as much foreign reserves as we honorably can.

Herman Siregar admits that basic necessity prices, especially those of rice, in Indonesia remain higher than in other countries. Therefore, he suggests that policies should be designed in such a way that prices do not burden consumers, yet stay fair for farmers. “If we make all rice prices low, farmers will have low income and they would find it hard to survive, let alone produce enough to cover our needs, let alone lower our imports. To keep farmer prices decent and consumer prices not too expensive at the same time, we need to reduce part of the production cost – in this case, middleman costs. We must limit both the existence of middlemen and the tax rates for farmers, so that farmers are not too burdened. For example, right now we impose a Land and Building Tax (Pajak Bumi dan Bangunan – “PBB”) on farmlands, taxes for processing and distributing food (including taxes for food processor and distributor employees), and even shops that sell foods are imposed with Value Added Taxes (VAT). Government taxes must be simplified, for example we tax only at the end part of production, and illicit levies should be eliminated. Taxes can account for 10%-20% of the end price. If we simplify taxation, that can mean 10%-20% efficiency that reduces the consumer’s burden,” he said.

Herman Siregar further said, “Electricity fees increase because a lot of the generators still use petroleum fuel, which we import. In the future, we should develop electricity generator fuel that does not depend on petroleum, such as geothermal or hydro power. Because if we continue to use petroleum fuel that we import, the Rupiah will weaken further, making the price of imported petroleum even higher. If we burden the State Electric Company (Perusahaan Listrik Nasional – “PLN”) too much, it will go bankrupt. They are in turn forced to adjust fuel prices, whether they want to or not.”

Enny Sri Hartati, Director of the Institute for Development of Economics and Finance (INDEF), said that “Domestic basic necessity prices increased, and we cover the gap of our needs with imports. This means that the Government has failed to perform the mandate of the Constitution, i.e. to defend the welfare of the common public. Basic necessity prices remain high after Eid-el-Fitr not because there is extremely high demand, or because the people’s incomes decrease. This is a matter of supply, meaning that some production is down or production costs increase. Prices of basic necessities increase because electricity costs rise, energy costs rise, material costs increase because of imports, depreciation, and other causes that attack simultaneously,” she said.

Usurious Practices
Economist Faisal Basri said that usury also increases the penetration of imports to Indonesia – and usurers are actually contributing to the upcoming Presidential Election in 2019. The Government has issued a recommendation for 3.7 million tons of salt imports, while we only need about 2.3 million tons. “I calculate that usurers get Rp 1 trillion from salt imports. Salt imports at 3.7 million tons x 1,000 = a maximum value of Rp 3.7 trillion. That’s how Golkar finds a new way to rob us after Setya Novanto was jailed,” he said.

Because imports flow too freely, there is a 3.7 million ton excess of national sugar supply. Earlier, there was an attempt to limit sugar imports by issuing a regulation that obliges the purchase of refined sugar through auctions. However, this regulation was revoked after the Corruption Eradication Commission (Komisi Pemberantasan Korupsi – “KPK”) sent a letter to the Minister of Trade. Rice imports January-Mei 2018 are already 896,000 tons, while total rice imports last year were only 305,000 tons. Rice imports this year might be a record even for Jokowi-JK’s Government.

Similar with Faisal Basri: Senior Economist Rizal Ramli said that our import policies damage our own farmers. Just imagine that the Government imports salt at 1.5 million tons more than what we need, then imports sugar at 2 million tons more than what we need. “This destroys our own salt and sugar sales. Farmers throughout Central Java said that they will no longer support Jokowi, that they would no longer elect Jokowi,” Rizal mentioned as we met him in Menteng, Central Jakarta.

Rizal said that our import policies create permanent dependence. For example, during shallot harvest in Brebes several years ago, the Government actually increased shallot imports, causing great losses to farmers. “The following year, the farmers reduced their harvest. But when they finished harvesting, imports were cut so that prices shot up again. This caused even more losses to the poor farmers, but great profit for crop cartels. In the next year, the farmers had to cut down on planting. Every time they reduce planting and harvesting, we are even more dependent on imports. This dependence is extremely dangerous, because it may become permanent. It’s not that we cannot plant our own shallots, corn, etc. When I was the Coordinating Minister of Economy, I suggested during the Cabinet Assembly that we should get rid of the mafia cartels. If we do that, soy prices would decrease, meat prices would decrease by 75%. But now meat prices are twice more expensive than prices in Sydney or Thailand,” he said.

Faisal Basri concludes that Jokowi’s Government has failed to embrace the poorest 40% of the nation who do not obtain the benefits of toll roads, MRT, airport trains and single-price petroleum fuel. “Most of our people are farmers, but our farmers’ exchange rate is lowered at the end of Jokowi’s Government. In fact, rice prices are pushed down at the farmer level because the Government wants to lower rice prices,” he said.

The Gini Index in rural areas also increased. This means that economic gap in rural areas increase, as the economic gap at national level decreased. Furthermore, 60% of poor people live in villages. Yet decreased poverty in the villages this year so far is 0.22%, while the decline of poverty in the cities is much bigger at 3.2%. “This shows how Jokowi’s Government neglected to uplift 40% of our poorest. This 40% is reflected in the sudden spike of votes obtained by Sudirman Said in Central Java and Sudrajat in West Java. These are the people who originally voted for Pak Jokowi, but changed sides because they suffer from the causes of the construction of too many toll roads,” Faisal Basri said.

Weakening Purchasing Power
The impact of increased basic necessity prices manifests as weakened buying power. This is most deeply felt by the lower classes. Loss of buying power means decreased welfare and stronger poverty. This is because the biggest expenditure for the lowest classes is for food – even up to 60% of expen­ditures in rural areas. Compare this with a mere 30% on food expenditures in the cities. The increase of food prices equals misery for the rural poor. “In order to resolve this condition, the affordability of basic necessities should be guaranteed. We must concentrate on keeping the people with the lowest income level well-fed – these include farmers, laborers, and owners of micro, small, and medium-sized businesses,” Herman Siregar stressed.

Lana Soelistianingsih said that the most painfully obvious impact of high basic necessity prices is the weakening of buying power. People discipline themselves from consuming more basic necessities, which means that welfare quality is down and domestic trading is also down.

Anwar Nasution said that high need and weakened buying power will increase poverty. “People are poor when they cannot even afford to buy basic necessities such as rice, chicken, eggs, etc.,” he said.

Enny Sri Hartati claims that household consumption, especially the lower 40% of the population, is under pressure. In micro-economic terms, the lowest 40% of the population generally work as laborers. With current conditions of rising costs and prices, laborers’ wages going down, especially those wages of informal laborers. This means that there is a significant drop in consumption. Why? Because these people can now only buy less with their reduced wages and rising costs. The part of their income spent for food was already 75%, now increasing to 77% in rural areas; and urban food expenditures rise from 70% to 72%. This means that the portion of the people’s income available for purposes other than food has declined, so the quality of their lives is also reduced.

Such is the case with “UMKM” – Small Micro Medium Enterprises. High prices of materials mean high prices of goods, and the public shops less. This means less income for UMKM, and they cannot spare much money to maintain operations, let alone to develop. To save costs, a lot of micro and medium companies had to let go of their workers, and they have to turn to uncertain informal sectors. When there is an increase of informal workers, uncertainty increases.

Steps to be Taken by Government
Herman Siregar suggests that the Government aid the people most directly and painfully feel the impact of rising basic necessity prices. For example, the Government should maintain subsidies for lower-level households, or direct to the consumer target. The Government should then take protective measures for farmers and small businesses, so that they can continue to get fair prices. Similarly, the Government must also maintain the smoothness of basic necessity distribution, so that lower class consumers are not faced with extremely high prices due to unwieldy distribution of foodstuffs. Therefore, the Government should perform sudden inspections more often, maintain sufficient stock of basic necessities, and ensure fair prices at farmer and small business levels.

With the current volatility of food prices, the Government’s presence is required in terms of consistent policy. “We must set the direction of industrial construction from the start – what industries should we focus on. Then we must be consistent with regulations or policies that we made. And then we must provide something for an incentive, or maybe some companies can delay implementing the UMP-minimum wage or we can either evaluate the UMP-minimum wage. The Government must coordinate with entrepreneurs and find out what these entrepreneurs need in order to be able to maintain production and distribution. Therefore, the Government can decide how to increase entrepreneurial productivity, such as helping them to expand, to export their goods. The key is how to increase productivity and competitiveness, so that we can hold our own with our competitors. As long as we have such pressures and high costs, we won’t be able to do anything,” Ahmad Heri Firdaus lamented.

Ahmad further hopes that there will be fundamental improvement in the food sector, starting from the upstream or production stage. For example, we must create a road map to increase production. Then we must maintain the efficiency of trading by monitoring prices, starting from agent level to direct seller (sellers who sell directly to end-users) level.

Lana Soelistianingsih suggested that the Government return its focus to food security from now on, by releasing Governmental farmlands. “This is not something that is as easy as falling off a log in the short term, but the Government must start on ways to guarantee food security,” he said.

Anwar Nasution suggested that in order to resolve the condition, the Government must deregulate by revoking improper permit procedures, reducing unnecessary costs, eliminating production inefficiency, and increasing exports. The Government must dare to shrink long distribution chains, because that contributes to high market sale prices. Furthermore, it must eliminate implicit taxes. “By this I mean the illicit bribes levied by punks on the highway to increase the prices of goods, but the Government has not taken any specific steps to deal with this. Such illicit highway levies should be reduced by improving police performance, as well as improving road facilities and traffic flow,” he said.

Ahmad Heri Firdaus criticizes the Government for blaming anything else when the market becomes volatile, then taking short-term oriented steps to remedy a problem. For example, it once set a maximum price for eggs, like it sets the highest retail price (harga eceran tertinggi – “HET”) for rice.

“The business world is not something that the Government can dictate. Is should create a conducive climate for business and investments. HET has a noble purpose, i.e. to keep things from being too expensive, but we must see from the upstream why they become expensive. That’s what we have to unravel and correct. For example, imported livestock feed is rare. Do we take in more imports, or do we increase corn production to increase supply? Policies should be oriented for the long-term, and they must resolve the issue right at the roots. Right now, there are only short-term policies with political benefits always a factor in decisions. As the name implies, long-term policies take a long time to show results, but we hope that we can resolve some issues first. In many cases, the Government is still chained to short-term interests because it sets short-term targets, while it forgets to try and resolve things from the fundamentals. This is bad, because the problems will abate only for a short time, only to recur later and perhaps even at a worse intensity,” he warned. (Dessy Aipipidely, Ekawati, Syahrul)