Yogyakarta (ANTARA) - The government's announcement of easing inflation in July 2023 has been met with much cheer and appreciation by all parties.

However, the government and all related stakeholders, must not slacken their vigilance yet, given that the threat of the El Nino heat phenomenon has become visible. Added to this, a study has predicted that the phenomenon may trigger increased inflation.

Earlier, Statistics Indonesia (BPS) revealed that the national inflation rate in July 2023 was recorded at just 3.08 percent (year-on-year/yoy), a decline compared to 3.52 percent yoy the previous month.

The data drove many parties to praise the government, with most of them, including economic observers, assigning credit to the Ministry of Home Affairs and the Finance Ministry for their efforts to control inflation, which included providing fiscal incentives to regional governments.

Both ministries have been collaborating to incentivize regional governments whose efforts they have deemed to be on point and successful in controlling inflation.

In 2023, the government has allocated as much as Rp1 trillion (US$66 million) for the fiscal incentives, in accordance with the Finance Minister's Regulation No. 67 of 2023 concerning fiscal incentives for appreciating performance in the 2023 fiscal year.

The regulation stipulates that the fiscal incentives are meant to be allocated over three periods to ensure continuous monitoring of performance enhancement, enabling the government to extend immediate appreciation to well-performing parties.

The incentive initiative is mainly aimed at maintaining the rate of inflation at an acceptable level. It should be noted that a low inflation rate means a lot to communities, since, to a certain degree, it determines their living standard.

Inflation can also affect Indonesia's journey toward building a prosperous country, especially in terms of human resource quality as well as economic certainty. What is crucial here is ensuring the stability of prices while improving the welfare of the people.

During the first phase of the fiscal incentive provision, 33 regions have been named as recipients based on their exemplary performance in controlling inflation, as evidenced by their compliance in submitting daily reports, success in maintaining food price stability, and dedication to expediting the realization of spending on activities aimed at controlling regional inflation.

Overall, the central government has allocated Rp330 billion (US$21.7 million) for the 33 regions comprising 24 districts, 6 cities, and 3 provinces.

Despite the country enjoying a positive inflation trend, Home Affairs Minister Tito Karnavian has asked that all related parties, including regional governments, stay vigilant to anticipate the detrimental effects of El Nino, especially drought.

In this context, President Joko Widodo (Jokowi) is paying serious attention to the potential for drought, urging regions to make all-out efforts to anticipate likely problems.

The head of state has issued a number of directives to guide regions in facing the phenomenon. He has instructed related parties to ensure the availability of water supply by optimizing reservoirs and retention basins.

At the central government-level, President Widodo has pushed for efforts to secure the availability of water to meet the need for drinking water as well as irrigation, saying he believes that sufficient water availability is crucial for preventing harvesting failures and thereby, solidifying the country's food resilience.

The peak of El Nino, which is projected to prevail in Indonesia from August to September this year, may pose serious threats to the country's food resilience, so it is completely reasonable for the government to formulate anticipatory measures against it.

According to economic experts, the phenomenon can lead to two types of inflation, namely imported inflation and cost-push inflation.

A country is said to be experiencing imported inflation when the prices of imported products increase, which, in turn, push up prices of all products and services.

Meanwhile, cost-push inflation occurs when a country's domestic production declines, resulting in increased product prices. Both types of inflation are expected to occur soon, with their effects likely to be felt in the next few months, according to economic analysts and experts.

Last week, the United States' National Oceanic and Atmospheric Administration (NOAA) forecast that over the next 6 to 9 months, the world can expect to experience the slowly-intensifying effects of El Nino.

The heat phenomenon is predicted to increase the frequency of extreme weather in the southern part of the planet. Based on research conducted by Dartmouth College, El Niño events in 1982–83 and 1997–98 caused the gross domestic product (GDP) of the US to decline by 3 percent in 1988 and 2003.

In fact, in 2003, El Nino caused a 10-percent decline in the growth of the agriculture sector of Peru and Indonesia, a sector that contributed as much as 15 percent to the two countries' GDP.

Statistical modeling devised by Bloomberg Economics last week outlined that the previous season of El Nino caused a 4-percent drop in the inflation rate of non-energy commodities.

During El Nino, inflation rates in the Latin Americas are estimated to increase by 0.75 percent and in Southeast and South Asian countries by 0.5 percent.

Bearing all this in mind, all related stakeholders in Indonesia should continue making even greater efforts to optimally anticipate El Nino, since a well-managed inflation rate would mean nothing if El Nino eventually manages to catch the country off guard.

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Translator: Nusarina Y, Tegar Nurfitra
Editor: Azis Kurmala
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