Now the Time to Boost Demand in the Economy
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Joko “Jokowi” Widodo and Jusuf Kalla\'s administration was three years old last month. A number of policies have been introduced to boost development and improve the people’s welfare.
Entering the last two years of Jokowi’s government, there should be no problem to give a critical evaluation of the various achievements as an important input for a future improvement. However, the assessments made in this article are not comprehensive. It will only highlight some key indicators of the Indonesian economy that are used as benchmark standards in assessing the economic performance of a country.
Macroeconomic indicators
Similarly, some of the statistical indicators presented in this article cannot be attributed solely to government policies. There are many domestic and external factors that are not fully controlled by Jokowi. Some are even inherited from the previous government policies. The following are the description and evaluation of these indicators.
First, healthy economic growth, but with a lower rate. The Indonesian economy is projected to grow 5.1 percent this year, or increase by an average of 5 percent a year over the next three years. The figure is higher compared to neighboring ASEAN countries, such as Singapore (2.5 percent), Malaysia (4.8 percent) and Thailand (3.5 percent), but it is lower than the growth rate of previous years that reached an average of 6 to 7 percent per year. The lower growth rate is due to the decline in expenditure levels, especially investment and consumption.
So, how about the economic growth rate in the next few years? Indonesia\'s economy is expected to maintain a healthy growth rate, although it will be relatively low at 5.2 percent next year and 5.3 percent in 2019. The increase is in line with higher investment. The growth can be maintained at least within the 5 percent range as Indonesia\'s macroeconomic fundamentals improve as a result of structural reforms and policy deregulation carried out by the government. An improvement of the economy in some big countries, such as the United States and some countries in the EU, which has shown a sign of recovery, is expected to further support Indonesia’s economic growth.
Second, improvement of the investment climate and infrastructure development. In addition to the implementation of several deregulation measures, there is also in increase in investment thanks partly due to the acceleration of the infrastructure development carried out by Jokowi. The government\'s investment in infrastructure development serves as a trigger for economic growth, which then gives a multiplier effect on domestic and foreign investments.
Infrastructure development will increase the potential capacity of the economy that can boost economic growth to a higher level in the future. However, the impact on public consumption will not be felt instantly. This is because infrastructure development gives more impact on the supply side rather than the demand side of the economy. The impact on the demand side has a time lag before it can be felt directly by the people. Similarly, a large part of infrastructure development projects have just begun or will be completed at the end of next year and in 2019.
Third, the budget deficit and government debt. The state budget is expected to record a deficit of 2.9 percent of Gross Domestic Product (GDP) this year, the highest in 17 years. The previous highest deficit of 3.7 percent of GDP was recorded in the 2001 state budget. This simply means that the condition of state finance has been at "the stake is bigger than the pole" (spending is bigger than earnings).
The widening of the state budget deficit is not surprising given the large budget allocation for infrastructure development, which increases on average 25 percent per year from Rp 177.9 trillion in 2014 to Rp 387.3 trillion this year. On the other hand, the government\'s ability to boost state revenues tends to decline. State revenue increases slowly, and even tends to stagnate. The tax ratio to GDP in the last three years has declined.
The solution to cope with the widening deficit taken by Jokowi\'s government is to raise more debt. Throughout the three years of Jokowi\'s administration, government debt increased by Rp 1.261 trillion or by 34.8 percent from Rp 2.604 trillion at the end of 2014 to Rp 3.867 trillion in September 2017. In the next two to three years, a further increase in the amount of debt seems to be inevitable as the government’s ability to explore new sources of state revenue to finance development is still weak and not yet optimal.
Fourth, inflation and exchange rate. The inflation rate that measures how fast the prices rise tends to decline during the three years under Jokowi. In 2014, the first year of his administration, inflation reached an eight-year high at 8.36 percent due to high crude oil prices. Inflation then dropped dramatically to 3.35 percent in 2015 and 3.02 percent last year. This year, inflation is expected to further decline to 3 percent.
In addition to low oil and commodity prices in the world, low inflation is also partly caused by low lending growth and weak domestic consumption. The monetary stimulus through the cuts in base interest rates by Bank Indonesia (BI) in recent times, as well as an increase in government spending, can slightly increase inflation in the next two years. However, the increase in inflation will not occur drastically and will be still below the 1 percent range or above 3.5 percent as targeted by BI.
Homework
As with inflation, the rupiah exchange rate also weakened during Jokowi\'s three-year reign. The rupiah against the US dollar weakened from Rp 10.000 to Rp 12.000 per US dollar in 2010-2014 to Rp 13.500 US dollars at present. The rupiah even dropped to Rp 14.693 to the US dollar at the end of 2015 -- the lowest since the monetary crisis in 1997 and 1998.
The weakening of the rupiah is mainly caused by the increase in the interest rate of the Federal Reserve (Fed) that has occurred for three times since last December. This makes investment in the US more profitable for investors, who exchanged their rupiah with the US dollar that consequently resulted in the weakening of the rupiah. The rupiah is expected to further weaken in the next two years as the Fed is expected to further increase its interest rates by the end of this year and next year.
The increase in US interest rates is even expected to occur three times next to cope with the overheating of the US economic engine. On the one hand, the weakening of the rupiah will increase the price of imported goods and foreign exchange receipts from tourism and exports.
Fifth, unemployment, poverty and inequality. As a consequence of the low economic growth that has not increased from the 5 percent range, the economic ability to absorb labor and reduce poverty is also not optimal. The national open unemployment rate continues to decline by 5.33 percent of the workforce this year. However, the growth elasticity of the new productive employment only reaches the range of 200,000s, far lower than the national needs and demographic growth that need the availability of 1 million productive jobs.
With economic growth that is stagnant at 5 percent, the decline in the poverty rate is far from expectations. The national poverty rate is still at 10.64 percent or 27.77 million Indonesians still living in absolute poverty. The number of poor people even slightly increased by 6,900 people between September last year and March due to the delay in the implementation of government policies.
With the low absorption of the labor force and the slowing of poverty reduction, it is difficult to reduce the inequality and the gap in people’s incomes. Inequality rates are still high with a Gini ratio of 0.393 this year, or a slight drop from 0.414 in the second half of 2014.
The high rate of inequality and a low consumption growth also contribute to the decline in people\'s purchasing power. In conclusion from the above description, Jokowi has been able to manage the economy well during his three-year administration, marked by strong economic fundamentals.
His focus on infrastructure development has been able to reinvigorate investment and capital formation that was previously hampered by inadequate infrastructure facilities.
The breakthroughs in the supply side of the economy carried out by Jokowi through massive infrastructure development also open more space and greater growth potential over the next few years.
However, entering the last two years of Jokowi-Kalla\'s term in office, the government needs to be aware of the emerging economic trends both nationally and globally. Large government infrastructure spending and the low growth in state revenues will further depress the state budget and increase the amount of debt. From the global side, the US interest rate increase could further weaken the rupiah against the US dollar and increase the balance of payments deficit due to the halt in fund inflows.
In the short term, the impact of the trend is the stagnant growth in consumption and purchasing power. The government’s aggressive efforts to increase tax revenues and infrastructure spending can negatively affect the demand side of the economy. It could further result in the weakening of productive job creation, poverty reduction and inequality. The lack of productive employment, poverty and inequality could become a social time bomb in which its impact has actually begun to be felt. Therefore, it becomes imperative for Jokowi to start shifting his focus to the demand-side management of the economy over the next two years.
M IKHSAN MODJO
Technical Advisor to UNDP
