Fears that Indonesia will fall into recession in the third quarter of 2020 have triggered "panic" in deciding economic policies. A number of policies have been launched to cope with extraordinary conditions.
By
ENNY SRI HARTATI
·6 minutes read
Fears that Indonesia will fall into recession in the third quarter of 2020 have triggered "panic" in deciding economic policies. A number of policies have been launched to cope with extraordinary conditions.
To mitigate the effects of the devastating pandemic, extraordinary policies and measures are needed. However, whatever the policy, it must still be measurable and effective in solving problems. The most crucial problem as a result of the pandemic is the disruption of the people’s economic activities. As a consequence, economic growth falls and unemployment increases, causing a decline in the people’s purchasing power. This phenomenon has hit almost all countries, eventually bringing them to the brink of recession. Actually, a recession in the middle of a pandemic is normal, so no excessive policies are needed.
At the start of the COVID-19 pandemic, the government issued regulation in lieu of law (Perppu) No. 1/ 2020, which was approved by the House of Representatives and became Law No. 2/2020. The government is given the freedom to widen the state budget deficit, including taking emergency measures without the need to consult with the House. The state budget deficit, which was fixed only at Rp 852.9 trillion (US$57.36 billion) or 5.07 percent of gross domestic product (GDP) under Presidential Decree No. 54/2020, was later increased to Rp 1.03 quadrillion or 6.34 percent of GDP.
Under the National Economic Recovery (PEN) program, spending for COVID-19 handling is at Rp 695.2 trillion. The Finance Ministry has also asked Bank Indonesia (BI) to share the burden in coping with the pandemic. As part of the burden-sharing scheme, BI has agreed to buy Rp 397.56 trillion in government bonds and bear the cost of the interest payments.
With BI\'s willingness to share the burden or become a government cashier, the COVID-19 mitigation budget should no longer become a problem because more than 58 percent would be covered by the central bank.
Whatever the policy, it must still be measurable and effective in solving problems.
As of Aug. 19, Rp 174.79 trillion of the PEN budget has been spent, which is 25.1 percent of the total. Amid the recent spike of new COVID-19 cases, spending on health care has totaled only Rp 7.36 trillion. The low disbursement of the budget did not only hamper the procurement of personal protective equipment for medical personnel, but also testing, tracing and treatment efforts.
As a result, the number of new COVID-19 cases continues to increase. Meanwhile, the realization of the state budget for social protection budget is not bad, reaching Rp. 93.18 trillion or 49.7 percent of the total. The social safety net program should be effective in maintaining the purchasing power of the bottom 40 percent of the population.
However, in July and August, Indonesia recorded a deflation of 0.1 percent and 0.05 percent, respectively, indicating a decline in the people’s purchasing power. In coping with the impact of the fall in purchasing power, it is impossible to rely solely on social safety net programs, because the expenditure of the bottom 40 percent of the population is only 17 percent. The largest contributor is the top 20 percent of the population (45.49 percent), followed by the middle 40 percent segment (36.78 percent).
However, the top 20 percent group has still held back spending because of uncertainties in the handling of COVID-19 and the fact that this income segment still avoids shopping centers. As of August, the average visit rate to shopping centers has been 30-40 percent compared to those in normal conditions, while the rate of sales has been 60-70 percent. Outside Bogor, Depok and Bekasi in West Java, as well as Tangerang in Banten (Bodetabek), the average sales rate reached 30-40 percent. This income group chose to save — just in case. This was confirmed by the increase in third party funds in banks in July. During the period, savings grew by 6.3 percent and time deposits by 8.5 percent, especially deposits above Rp 5 billion.
The data indicates that economic recovery will only occur if the spread of COVID-19 is under control. The government can calculate the effectiveness of the various social assistance programs in holding back the recession in detail. Various assistance programs have been disbursed, including for workers with salaries below Rp 5 million per month. Micro, small and medium-scale companies (MSMEs) are also among the recipients to help them survive a pandemic. About Rp 123. 46 trillion have been allocated to help MSMEs.
Various programs have been launched and their disbursement has been accelerated. All were done under the pretext of avoiding a recession. All of these efforts are useless if implementation of the program is weak and not on target, including loosening economic activities, which may lead to the uncontrollable increase in new COVID-19 cases.
Scapegoat
Amid indications that the PEN program is not effective in curbing a potential recession, it is time to look for a scapegoat. There are those who disagree with the reimposition of large-scale social restrictions (PSBB) in Jakarta starting on Monday. In fact, for Jakarta, the PSBB is no longer an option. The daily increase in new COVID-19 cases in Jakarta reached 1,380 on Sunday (13/9/2020), bringing the total number confirmed cases in the capital to 54,220 on that day. Since early September, the transmission of the disease has been out of control. The occupancy rate in isolation and ICU units in hospitals in Jakarta has reached 77 percent and 83 percent, respectively. If the infection cannot be controlled immediately, within a week, the hospitals will be unable to accommodate new patients even though there is an increase in capacity.
If the spread of the disease becomes more uncontrollable, Indonesia will not only be "locked" by 56 countries, but could receive an economic "embargo", because they consider it would no longer be safe to do business with Indonesia and invest in the country. As a result, the PSBB policy, which has been implemented for almost six months, will end in vain. The country will fall into recession as feared, while COVID-19 becomes more uncontrollable.
ENNY SRI HARTATI, Senior researcher at the Institute for Development of Economics and Finance (INDEF).