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Weakening Rupiah Inflates Operational Costs for Enterprises

  • Rising production costs from a weakening rupiah and high interest rates may force businesses to raise prices, reducing consumer purchasing power.

  • Bank Indonesia and government policies are crucial to stabilize the economy by managing import costs and improving logistics efficiency.


By Muhammad Fazli Rabbaani, Valda Alesia Darmica, and Valeria Lisa 

June 19, 2024 at 16:30 GMT+7


Rising production costs and potential consumer price hikes due to the weakening rupiah and high interest rates are becoming a significant concern for businesses. Based on the Jakarta Interbank Spot Dollar Rate (Jisdor), on Friday (6/14), the rupiah closed at Rp16,374 per US$ or weakened 6.33% compared to the closing at the end of 2023.  


As the rupiah depreciates, the cost of imported raw materials and other production inputs rises, further exacerbated by the high interest rates that increase the cost of borrowing. Consequently, businesses may be compelled to pay these higher costs to consumers through price adjustments. 



This scenario likely leads to people's purchasing power erosion, as consumers find their money buying less than before due to the increased prices of goods and services. Furthermore, this chain reaction could have far-reaching impacts on the overall economy.


Stacks of both US dollars and Indonesian rupiah | Source: Doc. Antara


The weakening rupiah has created significant challenges for Indonesian industries, particularly those reliant on imported raw materials. A decline in currency value has increased import costs, making it difficult for businesses to maintain their profit margins. 


Furthermore, the rise in overseas shipping costs has disintegrated the competitiveness of Indonesian exports. To address these challenges, the government must intervene to stabilize the exchange rate and support business actors. 



This could involve implementing policies to reduce the impact of currency fluctuations on import costs and improving the efficiency of the logistics sector to reduce shipping costs. By doing this, the government can reduce the negative effects of the weakening rupiah and ensure the Indonesian economy continues growth and competitiveness.


Garment Production | Source: Tarko Sudiarno / AFP / Getty Images


Businesses are grappling with the dilemma of adjusting prices to offset rising production costs while striving to maintain consumer purchasing power. Recent data indicates that household consumption, a key driver of economic growth, only grew by 4.91% annually in 1Q24, compared to the usual growth rate above 5%. 


This weakening of purchasing power has decreased real sales, placing additional pressure on businesses already dealing with high operational expenses. In response to these economic conditions, Bank Indonesia may consider future interest rate adjustments to stabilize the situation. 



Such actions could help moderate inflation and support consumer spending, but they also carry significant implications for businesses and the broader economy. This scenario underscores the necessity for supportive policies to help businesses navigate these challenges and sustain economic growth.



 

Sources:

Bloomberg

CNBC

IDX Channel



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