The ongoing Russia-Ukraine war is disrupting global supply chains. The fluctuations of global food and energy prices have transmitted to the domestic market. This, among other things, is reflected in increasing inflation
By
DIMAS WARADITYA NUGRAHA, AGNES THEODORA,
·6 minutes read
ALIF ICHWAN
Export and import activities at the Jakarta International Container Terminal (JICT), North Jakarta, Wednesday (16/6/2021). The protracted Russia-Ukraine war has increasingly disrupted world supply chains and disrupted the performance of a number of industrial sectors.
JAKARTA, KOMPAS - Tensions due to the Russia-Ukraine conflict threaten global commodity supply chains that were previously disrupted by the Covid-19 pandemic. Appropriate measures need to be taken to ensure that the impact of this conflict will not interfere with national economic recovery.
Obstacles to global supply chains clearly occur in food commodities, for example. If the production of Russia and Ukraine are combined, the two countries account for a 30.1 percent share of the world wheat market, 23.4 percent share of world fertilizers and 14.5 percent of the world's corn share.
Regarding energy supply, Russia's coal export amounts to 15 percent, crude oil 11.9 percent and natural gas production 4.8 percent of the global market share respectively.
The bottleneck in the supply chains of various commodities, especially food and energy, automatically causes price fluctuations that instigate global inflation.
Head of the Fiscal Policy Agency (BKF) of the Finance Ministry, Febrio N Kacaribu, said that increasing commodity prices will exacerbate inflation in many countries. Based on the BKF study, this year's global inflation rate has the potential to soar from 3.8 to 4.6 percent, and will only slowdown in 2023.
Increasing prices at the global level will also affect prices at the national level. Statistics Indonesia (BPS) noted that the rate of inflation in March 2022 compared to March 2021 amounted to 2.64 percent. Year-on-year inflation this March was the highest since April 2020.
Although inflation is still within the projected range of Bank Indonesia (BI), which is 2 to 4 percent, if it is not addressed with the right mix of monetary and fiscal policies, Febrio is concerned that high inflation could weaken economic activity.
"We will continue to monitor and mitigate the impact. The rupiah exchange rate is still very well managed by Bank Indonesia. Fiscal policies and bansos [social assistance] will also be prioritized to maintain consumption power," said Febrio, early last week.
Apart from the fluctuations in commodity prices in global markets, inflation is beginning to increase within Indonesia due to higher demand in the midst of the post-pandemic recovery and the month of Ramadan.
Cutting growth
The uncertainty of the situation due to tensions between Russia and Ukraine made the World Bank cut its economic growth projection for the East Asia-Pacific region in 2022, from the previous 5.4 to 5 percent.
Meanwhile, the projection of Indonesia's economic growth in 2022 has been reduced from 5.2 to 5.1 percent, with a worst-case scenario of 4.6 percent economic growth.
BKF has set a slightly higher economic growth target this year, in the range of 4.8 to 5.5 percent.
Acting Head of the BKF Macroeconomic Policy Center, Abdurohman, pointed out that the increase in energy and food commodity prices also accelerates the absorption of government subsidy spending. "People's purchasing power is the main thing that must be maintained amid the transmission of rising global prices to domestic inflation," he said.
In the 2022 State Budget (APBN), the government allocates a total subsidy budget of Rp 206.96 trillion (US$14,410,184). The allocation is divided for energy subsidies of Rp 134.03 trillion and for non-energy subsidies of Rp 72.93 trillion. During the period from January to February, Indonesia's energy subsidy spending amounted to Rp 21.7 trillion, equivalent to 16.97 percent of the energy subsidy budget.
On the other hand, the Russia-Ukraine war has also served as “durian runtuh” (windfall profit) in Indonesia's revenue due to increasing commodity prices for exports. The Finance Ministry noted that state revenues in February amounted to Rp 302.4 trillion, a rate 37.7 percent higher than last year’s.
The increase in state revenue expands the flexibility of the social protection program, which this year is budgeted at Rp 154.8 trillion.
This social protection program serves 37.9 million consumers of subsidized electricity, 8 million metric tons of 3 kg LPG, 7.5 million cash assistance (BLT)-recipient families in rural areas, 10 million families who receive the Family Hope Program, 18.8 million families who receive basic food cards, 20.2 million students who receive Indonesian Smart Cards and 96.8 million families who receive funds to pay for health insurance premium.
AP/VITALY TIMKIV/AZ
Farmers harvest with their combines in a wheat field near the village Tbilisskaya, Russia, July 21, 2021. The Organization for Economic Cooperation and Development is warning that Russia's war in Ukraine will disrupt commerce and clog up supply chains, slashing economic growth and pushing prices sharply higher around the globe. In a grim assessment out Thursday, March 17, 2022, the 38-country OECD said that over the next year the conflict would reduce the broadest measure of economic output by 1.08% worldwide.
Trade chain
Head of BPS Margo Yuwono, on Thursday (7/4/2022), said that although Indonesia's trade balance with Russia and Ukraine is not too high, the war between the two can still hit the Indonesian economy through the transmission of the trade chain.
Indonesia's imports are dominated by raw and auxiliary materials, and the impact of increasing prices for a number of commodities at the global level will affect the supply and price of raw materials. This in turn affects the price of industrial products (output) due to rising production costs.
"The real sector will be hit, as will the people who have to face increases in the prices of various goods," said Margo.
According to the Head of Industry Division of the Indonesian Employers Association (Apindo), Johnny Darmawan, the impact of post-Russian geopolitical tensions has the potential to drag down the pace of post-pandemic economic recovery. For industry players, the impact is felt in the form of repeated disruptions to supply chains that were previously disrupted by the pandemic.
"Industries that import raw materials from Russia and Ukraine must quickly rack their brains to find other suppliers to prevent a shortage of raw materials that can disrupt production," he said.
The price of palm cooking oil is now rising domestically because it follows international market prices.
For example, the food and beverage industry imported 3.07 million tons of wheat from Ukraine and the iron and steel industry shipped in 486,000 tons of iron and steel ingots from Russia in 2021. The two industrial subsectors are currently looking for alternative supplies from other countries.
"Shifting like this is definitely not easy because the prices have changed, the logistical calculations have changed," said Johnny.
On the other hand, Indonesia has experienced a positive impact in the form of increasing prices for export commodities, such as coal and crude palm oil (CPO). However, Johnny argues, the impact is not always beneficial for society in general.
"For example, the price of palm cooking oil is now rising domestically because it follows international market prices," he said.
