New tax may worsen inflation

A government policy to impose import duties on raw materials may push fertilizer prices up and consequently food prices as well, an industry executive warned on Wednesday.

On December 22 the Finance Ministry began imposing an average 5 percent import duty on capital goods, where previously there was none. The duty is applicable to, among others, phosphorus and potassium, two of the main ingredients in fertilizers.

Johan Unggul, chairman of the Indonesian Fertilizer Trade Association (ANPI), said the new import duty has forced fertilizer manufacturers to raise their prices by 5 percent.

"We have contracts with buyers that say we have to pay a 10 percent penalty if we are late in delivering the raw materials. It's either that or pay the (5 percent) import duty," Johan said.

He said higher fertilizer prices would force many farmers to cut down on their usage. "This could reduce the amount of crops they produce, hurting food sustainability levels."

Johan said the higher price of fertilizer might push food prices up by 20 percent in the next three months when harvests yield lower than expected results.

"Every rupiah a farmer invests in fertilizer could yield five times the amount in profit from their crops," he said.

Ratna Sari Loppies, executive director at the Indonesian Association of Flour Manufacturers (Aptindo), said the price of flour could increase by 5 percent as wheat was among the goods hit by the new import duty, but producers were still maintaining their prices at the moment.

Ratna said flour manufacturers could increase prices gradually but she was worried that an increase could trigger social unrest.

Food prices have risen sharply since December and economists have warned that headline inflation would translate into core inflation if the central bank did not act urgently.

Suryo Bambang Sulisto, head of the Indonesia Chamber of Commerce, asked the government to scrap the import duty as it may prompt a higher inflation rate.

Industry Minister M.S. Hidayat said the government was discussing the new duty and its effects. "There's a good chance that we will (revoke it)," he said.