The Rupiah Exchange Rate Weakens, Prices of Goods May Rise

Depreciation of the rupiah increases the costs of industries that import raw materials. The price of imported goods also becomes more expensive.

KOMPAS/PRIYOMBODO (PRI)

A customer inspects US dollars purchased at the PT Valuta Inti Prima foreign exchange bureau in Cikini, Jakarta on Monday (20/11/2023).

JAKARTA, KOMPAS — The rupiah exchange rate is in a weakening trend, reaching IDR 16,000 per US dollar on the market. As a result, the prices of imported goods or domestically produced goods are at risk of rising.

Quoting Google Finance, the trading of rupiah on Monday (15/4/2024) opened at a level of Rp 16,120. This position is weakened compared to early April which was in the range of Rp 15,800-Rp 15,900. The exchange rate of rupiah in the market has crossed Rp 16,000 since April 10.

The weakening exchange rate of the rupiah adds additional costs to domestic industry players who heavily rely on importing raw materials or supporting materials in their production processes.

Vice Chairman of Agrarian Affairs, Spatial Planning, and Industrial Area of the Indonesian Chamber of Commerce and Industry (Kadin) Sanny Iskandar stated that the weakening of the rupiah exchange rate has wide-ranging effects, not only for business but also for consumers.

The weakening of the rupiah exchange rate results in additional costs for domestic industrial players who import a lot of raw materials or auxiliary materials in their production processes. The depreciation of the rupiah means they have to pay more to import the same price of goods.

TANGKAPAN LAYAR

The graph shows the movement of the rupiah exchange rate against the US dollar during the last month until Monday (15/4/2024). Source: Google Finance

"If the pressure cannot be resolved through efficient measures, it is not impossible for it to be passed on to consumers in the form of price increases," said Sanny when contacted on Monday (15/4/2024).

The majority of domestic manufacturing industries still heavily rely on imported raw materials and auxiliary materials. Based on data from the Central Statistics Agency (BPS), the total imports of raw materials or auxiliaries in January-February 2024 reached 72.47 percent of the total imports which amounted to 36.93 billion US dollars.

Raw materials and auxiliary materials are imported and then processed or produced into finished products in the domestic manufacturing industry. The high level of raw material imports by the manufacturing industry is due to the weakness of the upstream and intermediate industries in the country. Additionally, there are still many types of raw materials that cannot be produced domestically.

Prices are not competitive. This can reduce people's purchasing power.

Not only is there potential for an increase in prices of domestically manufactured goods, but also for imported goods. Importers will have to dig deeper into their pockets due to the weaker value of the rupiah, resulting in higher prices for the same value.

Quoting data from BPS, in January-February 2024, the total import of consumer goods reached 3.63 billion US dollars or 9.84 percent of the total imports. "The prices become uncompetitive. This can lower the purchasing power of the community," said Sanny.

BENEDIKTUS KRISNA YOGATAMA

Distribution of Imports by Type of Goods in February 2024. Source: Central Statistics Agency (BPS)

On the other hand, Sanny continued, the depreciation of the rupiah exchange rate also benefits other parts of the business world, namely exporters. Because with the same price, they can enjoy more profits when exchanging to the rupiah currency.

Sanny stated that what the business world needs is stability in the exchange rate of the rupiah. With a stable exchange rate, business actors can create more thorough plans in calculating their business.

Also read: Holding Price Increases from US Dollar Hits

In an online discussion held by the Eisenhower Fellowship Indonesia on Monday (15/4/2024), former Minister of Finance for the 2014-2016 period, Bambang PS Brodjonegoro, explained that the weakening of the rupiah exchange rate is mostly caused by the strengthening of the US dollar. This superpower's currency has not only strengthened against the rupiah but also against many other currencies.

The strengthening of the US dollar, according to Bambang, is because all countries in the world including Indonesia seem to be deceived by the decision of the US Federal Reserve to lower its benchmark interest rate, which was supposed to be decreased, but apparently not yet.

KOMPAS/PRIYOMBODO (PRI)

The atmosphere in one of the laptop stores in a shopping center in the Kuningan area of Jakarta on Wednesday (25/10/2023). The strengthening of the US dollar has begun to affect the prices of electronic goods. As a result, traders are beginning to feel a decrease in demand as consumers restrain themselves from shopping.

Due to the world being full of uncertainty, investors are choosing to store their funds in safer asset classes. Storing US dollars in US government bonds is considered safer, especially considering the high benchmark interest rate in the US.

This has spurred a flow of capital out of developing countries, including Indonesia, back to the United States. As a result, the supply of US dollars in the domestic market decreases, while the demand remains constant. Eventually, the value of the rupiah weakens.

"The weakening of the Rupiah is mainly due to the US dollar strengthening against all currencies," said Bambang.

Also read: Rupiah Depreciation Begins to Hit Manufacturing

Faculty member of the University of Indonesia's School of Economics and Business, specializing in International Economics, Fithra Faisal Hastiadi, stated that Indonesia should anticipate the potential inflation increase from the depreciation of the rupiah.

The selling price of domestic production has the potential to increase due to the increase in the costs of raw and auxiliary materials that must be obtained from imports. Likewise, imported goods also experience price increases (imported inflation).

According to him, the government needs to provide stimulus from the demand side to maintain the purchasing power of the community in the midst of potential inflation spikes.