OECD urges Indonesia to tackle supply-side inflation

JAKARTA, July 24 (Reuters) - Indonesia should tackle problems affecting its supply-side sectors such as poor infrastructure in order to help lower inflation over the longer-term to levels on a par with its main trading partners, the OECD said on Thursday.

The Organisation for Economic Cooperation and Development said the measures were needed aside from monetary tightening to contain inflation over the short-term.

Inflation is currently higher in Indonesia than in many of its main trading partners. At nearly 14 percent, Indonesia's average consumer-price inflation from 1995-2007 is well above the 2 percent average of its trading partners, the OECD said in a report.

"Over the longer term, policy effort should also focus on lowering inflation towards the average of Indonesia's main trading partners," it said its its first assesment of the country.

Analysts say that higher inflation in Indonesia is often due to supply-side factors such as poor infrastructure including roads and ports which push up the cost of distributing goods in the vast archipelago, rather than demand driven.

"The attendant impact on supply conditions should not be underestimated, especially if supported by concomitant pro-competition initiatives in product and labour markets," it said.

"This is also important for the conduct of monetary policy, because supply-related factors are believed to account for some of the downward price rigidity that has maintained Indonesia's inflation above that of its trading partners."

The OECD said it had started assessing Indonesia's economy given the country's potential in the global economy due to its vast population and rich natural resources.

"We are proposing to develop a special relationship - which we call enhanced engagement with five countries with a view to possible membership in the organisation. Indonesia is among these countries together with Brazil, China, India and South Africa."