`Chili Mafia' Hunted by Bank Indonesia for Stoking Inflation

(Bloomberg) -- They’re called the chili mafia -- a shady group of wholesalers who manipulate the price of Indonesia’s favorite spice -- and the nation’s central bankers are out to smash them.

The fact that Bank Indonesia has joined the police on the front line of fighting crime is an indication of how the archipelago nation’s economy functions, and sometimes doesn’t. The bank’s public enemy number one is inflation, which for most Indonesians is chiefly influenced by the price of food.

And in Indonesia, food means chili.

So when prices of the eye-watering red fruit jumped in February to a record 200,000 rupiah ($15) per kilogram, three times the normal level in the oil boomtown of Balikpapan, Sayid Fadli went to investigate.

“It was the mafia running the distribution chain,” said Fadli, chief of the Regional Inflation Control Team, a kind of price-watch SWAT unit established by the bank that includes police and officials from other ministries such as fisheries and agriculture.

A joint investigation between the police and the nation’s competition watchdog, the KPPU, turned up three people suspected of manipulating chili prices in the resource-rich province of East Kalimantan, according to Balikpapan KPPU chief Akhmad Muhari.

The dragnet quickly widened, and four people were arrested for allegedly running a similar scam on the island of Java, which houses the capital Jakarta, and more than half the nation’s population.

`Chili Mafia' Hunted by Bank Indonesia for Stoking Inflation

Cartel-like behavior affecting the cost of staples such as chili is a “serious economic problem’’ in Indonesia, said Brigadier General Agung Setya, director for special economic crime investigations with the National Police, which carried out the arrests.

Restrictions on food imports, unreliable harvests and the difficulty of moving produce around an archipelago of 7,000 inhabited islands, many with poor infrastructure, make smuggling and price manipulation a constant hazard in Indonesia.

The food racketeers have been singled out by President Joko Widodo, said the KPPU’s Muhari. “Pak Jokowi said stop the cartels.”

The case of the chili mafia involved a group of wholesalers who withheld supplies that were supposed to go to domestic markets and sold them instead to companies that make packaged food, according to Setya. The police didn’t disclose the names of the companies or those arrested.

Food Shocks

The government has made progress in improving living standards in the past two decades, but about half the nation’s 260 million people still live below or marginally above the official poverty line, according to the World Bank, making them especially vulnerable to food-price shocks.

A pick-up in inflation is restricting the central bank’s room to cut interest rates to give the economy a much-needed boost. Most economists surveyed by Bloomberg predict Bank Indonesia will keep its benchmark rate unchanged on Thursday.

Inflation jumped last month to 4.17 percent from a year earlier, the fastest pace in more than a year, and reached 5.03 percent in Balikpapan, exceeding the upper band of Bank Indonesia’s national target. Things could get worse this month in the run up to Ramadan. The fasting month begins at the end of May and marks a time when many local Muslims stock up on food for evening feasts.

`Chili Mafia' Hunted by Bank Indonesia for Stoking Inflation

A customer adds chili sauce to his food at a "kaki-lima" in Yogyakarta.

Photographer: Dimas Ardian/Bloomberg

Chili is a key marker for food inflation. It’s in everything from the ubiquitous instant-noodle dinners to saucers of sambal paste at restaurants, and in the street food of the kaki-lima, or "five legs" that line the sidewalks of every town.

Few places are more susceptible to price hikes than Balikpapan. East Kalimantan’s economy is built on oil and coal and slumping prices have hit the town hard. While the nation’s economy grew 5 percent in 2016, East Kalimantan’s shrank.

"The trigger for inflation for Balikpapan is affected by volatile food, especially chili," said Suharman Tabrani, deputy director for Bank Indonesia’s Balikpapan office. "Indonesians must have chili every day. We eat chili for breakfast.”

Balikpapan buys 89 percent of its chili and 98 percent of its rice from Java and other islands in Indonesia, according to the bank, and the story is the same for many other commodities, Tabrani said.

Buying Owls

So Bank Indonesia has come up with other ways to combat food inflation. As well as working with the police to break cartels, its officers spread out across the country teaching people how to grow more food. They harvest tomatoes in the hills above Bandung, help farmers grow rice near Medan and buy owls to ward off rats from the fields of Banyuwangi.

The central bank now has more than 500 Regional Inflation Control Teams spanning every province. They feed information back to the bank’s headquarters in Jakarta, where the data is used to assess the economy and help form monetary policy.

In Balikpapan, they also grow chilis.

Civil servants in the town distribute seeds and teach farmers and households about inflation. The bank’s office in the city has its own chili plant and even the army grows the spice “because there is no war," quips Tabrani, who has become known in the city as Pak Cabe, or "Mr. Chili."

On the outskirts of the city, on an east-facing slope behind the Islamic boarding school of Al-Mujahidin, half a dozen schoolboys tend plants bursting with bright-red chilies as part of a central bank project to teach the city’s students about inflation. Each day, they harvest the ripe fruit and take them to the kitchen of the girls’ school across the road, which prepares meals for both cafeterias.

Chili isn’t the only food that has attracted the attention of the price watchdog. Beef, poultry and garlic have also been investigated for price manipulation, said KPPU’s Muhari.

Last year, 32 cattle importers were found to be withholding stock from being sent to slaughter, he said. “Right now we are looking into sugar. I can’t talk much, but we are investigating."