Beware of the risks of a triple crisis following the pandemic: Jakarta Post contributor

JAKARTA (THE JAKARTA POST/ASIA NEWS NETWORK) – The Covid-19 pandemic has gradually subsided in many parts of the world, in line with notable progress in the rollout of the vaccine.

Mobility and economic activities have increased considerably. As demand increases with the resumption of economic activities, commodity prices have also increased. However, as the supply chain disruptions caused by the Covid-19 pandemic are not fully resolved, the upward trend in commodity prices continues.

The Russian-Ukrainian war has exacerbated the surge in commodity prices since February. This further disrupted supply, with Russia and Ukraine being among the biggest producers of energy and food.

Russia is the third largest producer of fuels, contributing around 8.7% of total world exports. With regard to food, Russia is the largest exporter of fertilizers, with a contribution of 12.6% globally, and the third largest exporter of cereals. Meanwhile, Ukraine is the second and third largest exporter of cereals and vegetable oils (sunflower) respectively.

Russia and Ukraine together contribute about 16% to world grain exports. Indirectly, the effects of the war inevitably make themselves felt throughout the world through the channel of prices, in particular in the poor importing countries of Asia and Africa.

Clearly, war is putting immense pressure on world food and energy markets. Prices for wheat, corn, grains, soybeans and crude palm oil (CPO) have soared with severe supply shortages. Oil prices have remained above US$100 (S$137) a barrel since late February, while coal prices have soared.

Food and energy import bills have already reached record highs and it seems inevitable that they will continue to rise. The consequences for poor and vulnerable countries will be particularly severe. Most countries in Sub-Saharan Africa and North Africa rely heavily (more than 70%) on wheat imports from Russia and Ukraine combined. With weak social safety nets and limited fiscal space, the sharp rise in food prices could trigger social unrest in these countries.

The great uncertainty in the global food market has prompted a number of countries to take precautionary measures to protect their national interests by restricting food exports. Argentina, Egypt and Indonesia have banned the export of cooking oils to secure domestic supply and control cooking oil prices. India, Algeria and Kazakhstan have banned wheat exports for similar purposes.

Indonesia lifted its cooking oil export ban on May 23. Meanwhile, China has limited its fertilizer exports. These measures will lead to a greater decrease in the global food supply and, in turn, prolong the spike in food prices. As commodity prices soar, inflationary pressures are mounting in all countries. The inflation rate in the United States hit a four-decade high in April.

Several European countries are facing a similar situation. Argentina and Turkey face extremely high inflationary pressures of 70% and 58% respectively. Rising inflationary pressures triggered a faster-than-expected tightening of global liquidity.

The US Federal Reserve’s decision in May 2022 to raise the Federal Funds Rate (FFR) higher than initially expected triggered a stock market rout in most emerging economies. As investors began to revalue their portfolios, stock markets began to fall as the local currencies of these emerging economies depreciated.

The tightening of global monetary policy has also increased the cost of funds to put additional pressure on the fiscal position, especially in highly indebted countries, as well as on businesses, which remain relatively fragile.

Against this backdrop, the global economy may be facing its greatest test since World War II. The war in Ukraine has aggravated the Covid-19 pandemic into crisis after crisis, potentially triggering a triple crisis: food, energy and finance.

Rising world commodity prices have affected the Indonesian economy, albeit moderately. Soaring international CPO prices led to a significant increase in domestic cooking oil prices, while soaring wheat, soybean and corn prices led to higher prices for several food commodities. The inflation rate of 3.5% recorded in April was higher than the rate of 2.6% recorded the previous month.

Nevertheless, the inflation rate in Indonesia has been relatively modest compared to other countries, especially advanced economies which have continued to register new multi-decade highs.

Unlike these countries, the global inflationary shock in Indonesia was almost entirely absorbed by the state budget, notably through energy subsidies. This policy option may be conceptually sub-optimal. However, in the current extreme conditions, safeguarding economic stability might be the best option we have. As a result, energy subsidies (fuel, liquefied petroleum gas and electricity) as well as compensations for the energy public companies Pertamina and PLN have increased considerably.

As the House of Representatives agreed last week, the 2022 state budget has been revised to accommodate a huge increase in government spending from 2,714 trillion rupees (257.8 billion Singapore dollars) to 3,106 trillion rupees, an increase in expenditure of 392 trillion rupees.

As the government expects to collect even higher revenues due to higher commodity prices, the budget deficit is lower than initially estimated. More importantly, this political maneuver encouraged Bank Indonesia to keep its interest rate unchanged, as it announced a few days ago.

In summary, the government budget is ready and fortunate to have enough headroom to absorb the current global shocks. Energy costs in Indonesia have remained relatively low compared to most other countries. There are no long queues at petrol stations, as is becoming increasingly common in many countries.

Most Indonesian families also benefit from relatively low cooking gas prices, as the government closes the huge gap between the market price and prevailing retail prices. But the public should not take these privileges for granted as the state budget has to bear the huge additional costs of more than 400 trillion rupees.

  • The author is Director of the Macroeconomic Policy Center of the Fiscal Policy Agency of the Ministry of Finance. The Jakarta Post is a member of the Straits Times’ media partner, Asia News Network, an alliance of 23 news outlets.