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 vaccine roll-out.

Mobility and economic activities have increased significantly. As demand rises with the resumption of economic activities, commodity prices have also risen. However, as supply chain disruptions from the Covid-19 pandemic are not fully resolved, the soaring trend in commodity prices is prolonged.

The Russia-Ukraine war has exacerbated the upsurge in commodity prices since February. It has disrupted the supply side even further, as Russia and Ukraine are among the biggest producers of energy and food products.

Russia is the third biggest producer of fuels, contributing around 8.7 per cent of total world exports. As for food, Russia is the biggest fertiliser exporter, contributing 12.6 per cent globally, and is the third biggest exporter of cereals. Meanwhile, Ukraine is the second and third biggest exporter of cereals and vegetable oils (sunflower), respectively.

Russia and Ukraine combined contribute around 16 per cent of global cereal exports. Indirectly, the war's impacts are inevitably felt worldwide through the price channel, particularly the poor importing countries in Asia and Africa.

Clearly, the war puts immense pressures on the world's food and energy markets. The prices of wheat, corn, grains, soybean and crude palm oil (CPO) have skyrocketed with severe supply shortages. Oil prices have stayed above US$100 (S$137) per barrel since late February, while coal prices have jumped through the roof.

Import bills for food and energy commodities are already at record levels, and it seems inevitable that they will continue to rise. The consequences for poorer and vulnerable countries will be particularly severe. Most Sub-Saharan and North African countries rely heavily (more than 70 per cent) of wheat imports from Russia and Ukraine together. With weak social safety nets and limited fiscal space, sharply rising food prices could trigger social unrest in those countries.

The high 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 banned exporting cooking oils in order to secure domestic supplies as well as to control cooking oil prices. India, Algeria and Kazakhstan have banned wheat exports for similar purposes.

Indonesia lifted its export ban on cooking oil on May 23. Meanwhile, China has restricted its fertiliser exports. These measures will lead to greater shrinking of the global food supply and in turn, prolong high food prices. As commodity prices skyrocket, higher inflationary pressures are rising across countries. The inflation rate in the United States reached a four-decade high in April.

Several European countries are facing a similar situation. Argentina and Turkey are facing extremely high inflationary pressures of respectively 70 per cent and 58 per cent. The surging inflationary pressure has triggered faster-than-expected tighter global liquidity.

The US Federal Reserve's decision in May 2022 to raise the Fed Fund Rate (FFR) higher than initially expected triggered a stock market rout in most emerging economies. As investors started to reweigh their portfolios, stock markets started to fall while the local currencies of these emerging economies depreciated.

The tighter global monetary policy has also increased the cost of funds to put additional pressures on fiscal position, particularly in highly indebted nations, as well as on businesses, which remain relatively fragile.

Against this backdrop, the global economy is perhaps facing its biggest test since World War II. The war in Ukraine has compounded the Covid-19 pandemic in a crisis upon a crisis, potentially igniting a triple crisis: food, energy and finance.

Rising global commodity prices have affected the Indonesian economy, albeit moderately. The surging international CPO price has caused a significant increase in domestic cooking oil prices, while the soaring prices of wheat, soybean and corn have induced a rise in several food prices. The 3.5 per cent inflation rate recorded in April was higher than the 2.6 per cent recorded the previous month.

Nevertheless, the inflation rate in Indonesia has been relatively modest compared to other countries, in particular advanced economies that have continued to record new highs in several decades.

Unlike those countries, the global inflationary shock in Indonesia has been absorbed almost fully through the state budget, especially through energy subsidies. This policy option might be sub-optimal conceptually. However, under the current extreme condition, safeguarding economic stability might be the best option we have. As a consequence, energy subsidies (fuel, liquefied petroleum gas and electricity) as well as compensation for energy state-owned enterprises (SOEs) Pertamina and PLN have jumped significantly.

As the House of Representatives agreed last week, the 2022 state budget was revised to accommodate a huge increase in government spending from Rp 2,714 trillion (S$257.8 billion) to Rp 3,106 trillion, or a spending increase of Rp 392 trillion.

As the government expects to collect even higher revenues owing to higher commodity prices, the fiscal deficit is lower than the initial estimate. More importantly, this policy manoeuvre has encouraged Bank Indonesia to keep its interest rate unchanged, as it announced a few days ago.

In summary, the state budget stands ready and is quite fortunate to have adequate room to absorb the current global shocks. Energy costs in Indonesia have stayed relatively low compared to most other countries. No long queues are seen at gas stations, as is becoming more common in many countries.

Most Indonesian families are also enjoying relatively low cooking gas prices as the government is filling 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 must bear the additional huge costs of more than Rp 400 trillion.

• The writer is director of the Macroeconomic Policy Centre at the Finance Ministry's Fiscal Policy Agency. The Jakarta Post is a member of The Straits Times media partner Asia News Network, an alliance of 23 news media organisations.