The mudik tradition gives rise to a huge boost in terms of money circulation in Indonesia as millions of people travel from the cities to the villages carrying trillions of rupiah (hundreds of millions of US dollars) with them (supported by the pay out of workers’ 13-month salary). Therefore, it is no surprise that this period always causes a peak in inflation in Indonesia (there are two annual inflation peaks in Indonesia; the other arriving in the December-January period when consumption rises due to Christmas and New Year celebrations).

Indonesian President Joko Widodo expressed that - this year - he wants to prevent inflation from jumping as sharply as was seen in preceding years. This would mean that the government has to anticipate inflationary pressures by securing ample supplies of food items such as rice, beef, chicken meat, onions, chilies and eggs as well as transportation costs and energy prices.

However, each year the government has this intention but it usually fails to avert high inflation in the months June-July. This is partly attributable to the complex undertaking as it involves the production and the distribution sectors as well as the trade system in a huge archipelago consisting of more than 17,000 islands (one that is plagued by weak quality and quantity of infrastructure development) and inhabited by some 255 million people.

Another issue is that the Indonesian government has a weak track-record regarding the coordination and cooperation between ministries and/or other (non-ministerial) government institutions. To stabilize food prices, however, it requires good cooperation and coordination among these institutions. In the case of rice, for example, Indonesia's Agriculture Ministry monitors the rice reserves, the Trade Ministry monitors the supply and demand chain, the Transportation Ministry is responsible for the smooth distribution, while Bulog is responsible for market operations (and rice imports). Moreover, it requires smooth cooperation between the public and private sector as the latter is the main food supplier. On average rice consumption during the Ramadan month increases by 10 - 15 percent due to dinner parties in the evening.

Recently Indonesian Finance Minister Bambang Brodjonegoro stated that smooth government action resulted in low inflation during the Ramadan-Idul Fitri period last year. However, last year Indonesia's economy was in a more difficult condition with a rapidly depreciating rupiah rate ahead of monetary tightening in the USA, slowing economic growth and declining consumer confidence. Concerns about job security and income made Indonesian consumers cautious and less consumptive. This year, however, conditions look more promising. Indonesia's GDP growth accelerated in Q4-2015 giving rise to optimism that this momentum will be maintained in 2016, the rupiah has appreciated about 4.5 percent against the US dollar so far this year, while the government has shown its commitment to push for infrastructure development as well as its commitment to overall economic development through the 12 economic policy packages that include deregulation and tax incentives. This context may make Indonesians more likely to consume during the coming Ramadan and Idul Fitri festivities, hence giving rise to inflationary pressures.

Inflation in Indonesia:

Month  Monthly Growth
 Monthly Growth
 Monthly Growth
 Monthly Growth
January          1.03%          1.07%         -0.24%          0.51%
February          0.75%          0.26%         -0.36%         -0.09%
March          0.63%          0.08%          0.17%          0.19%
April         -0.10%         -0.02%          0.36%
May         -0.03%          0.16%          0.50%
June          1.03%          0.43%          0.54%
July          3.29%          0.93%          0.93%
August          1.12%          0.47%          0.39%
September         -0.35%          0.27%         -0.05%
October          0.09%          0.47%         -0.08%
November          0.12%          1.50%          0.21%
December          0.55%          2.46%          0.96%
Total          8.38%          8.36%          3.35%

Source: Statistics Indonesia (BPS)

Inflation in Indonesia and Central Bank Target 2008-2015:

   2008  2009  2010  2011  2012  2013  2014  2015
(annual percent change)
  9.8   4.8   5.1   5.4   4.3   8.4   8.4   3.4
Bank Indonesia Target
(annual percent change)
  5.0   4.5   5.0   5.0   4.5   4.5   4.5   4.0

Source: Bank Indonesia


Lex McGuir |

But the Indonesian banks stopped cashing foreign checks to people have less money and foreigners are less likely to retire in Indonesia. This would not have been a problem in the Philippines because the banks are more advanced see It is natural that everyone would view reducing paper exchange would be good but not when the system is not set up to maintain the business.