Reindustrialization and Macroprudential Liquidity Incentives

So that the current condition of deindustrialization does not continue, the government needs to immediately carry out reindustrialization.

Indonesia is facing symptoms of premature deindustrialization. This condition is at least reflected in the contribution of the industrial sector to gross domestic product which is slowly shrinking. Based on data from the Central Bureau of Statistics, the phenomenon of deindustrialization appeared to have reached its peak starting in 2002 and has accelerated since 2008.

As an illustration, during the 2002 period, the industrial sector still contributed a significant amount, reaching 28.25 percent, although it decreased compared to 2001 which reached 29.05 percent. Then, in 2008, the share of the manufacturing industry to the national GDP decreased again to 27.8 percent and then dropped to 22 percent in 2010. When Indonesia faced the Covid-19 pandemic, the role of the manufacturing sector further decreased to 19.8 percent in 2020 and post-pandemic, it dropped even further to 18.67 percent at the end of 2023.

From the perspective of industrial sector growth, it is closely tied to national economic growth. Before the 1997 crisis, industrial sector growth reached 12 percent per year, surpassing the national economic growth which reached 7-8 percent. However, since the economic crisis until now, the performance of the industrial sector has continued to decline and has not been able to return to pre-crisis conditions.

Also read: Early Deindustrialization

Continued decline in the contribution of the industrial sector before its time is certainly not beneficial for the Indonesian economy. This may also have caused Indonesia's economy to grow stagnant at around 5 percent.

However, the industrial sector is expected to play a significant role in driving economic growth, alleviating poverty, and creating employment opportunities to reduce the high unemployment rate. Moreover, we know that Indonesia has a large productive population, with the majority having graduated from high school. The industrial sector is the most capable of absorbing a significant amount of workforce with such a demographic.

The unfavorable condition can also make Indonesia's desire to become a developed and high-income country by 2045 merely a dream. Because to become a developed country, the role of the manufacturing sector towards GDP must be maximized and become the main strategy for building the economy. Some experiences of several countries in Asia becoming developed countries due to their successful industry-building can be used as a reference, such as South Korea, Japan, and Taiwan.

Therefore, it is necessary to carry out a series of anticipatory efforts so that the condition of deindustrialization does not continue and threatens Indonesia to fall into the middle income country trap (middle income trap). This means that the government needs to immediately carry out re-industrialization in a measurable and sustainable manner. In this way, we will again place industrial development as a solution in solving economic and social problems. We need to reposition the industrial sector as a development agent in an effort to contribute to improving community welfare.

Of course, the government needs to initiate various policy strategies that encourage reindustrialization. For example, reindustrialization policies through increased investment, both domestic and foreign investment.

This step is followed by efforts to increase exports through the extension of export destination countries so as not to rely on only a few countries. In this way, the production generated by the domestic industry will have market certainty.

We need to reposition the industrial sector as a development agent in an effort to contribute to improving community welfare.

The development of various industrial clusters and increasing productivity in the industrial sector also needs to continue by prioritizing the advantages of each cluster. Likewise, efforts to use domestic production are always promoted and implemented. This is important because the production output produced by industry can be absorbed so that the production machines continue to roar and at the same time it can reduce imports so that it can indirectly save the country's foreign exchange.

Another equally important aspect is protecting domestic industries through restrictions on imported goods to avoid flooding the domestic market. Perhaps we often hear complaints from industry players about the influx of imported goods, causing their products to lose competitiveness and ultimately leading to business closure and job losses.

Appreciation is given to the government for its policy to limit electronic and textile imports. The momentum for reindustrialization is open in line with the optimistic trend of the Purchasing Manager Index (PMI).

Sweet herbs

In building an industry, significant financing is undoubtedly needed. This is where the role of banking is significant in supporting reindustrialization. Moreover, the banking sector still has sufficient room to provide its credits.

The position of the ratio of credit to funding received by banks, both in the form of third party funds (DPK) and wholesale funding, such as loans, issuance of long-term debt securities and rights issues of shares, is very supportive. . Liquid assets are also still large. According to Bank Indonesia records, as of the first quarter of 2024, the ratio of liquid assets to TPF reached 27.18 percent.

The portrayal of credit for the industrial sector is also still positive with maintained credit quality. Based on March 2024 data, credit for the processing industry grew by 9.13 percent, higher than the growth in March 2023 which was 6.50 percent. Although it has increased, this achievement is still lower compared to the aggregate credit growth which reached 12.40 percent.

To provide encouragement for banks to disburse credit more rapidly to the industrial sector, BI has prepared a sweet drink in the form of liquidity incentives in the Macroprudential Liquidity Policy (KLM) scheme. Liquidity incentives are provided in the form of easing minimum statutory reserves (GWM) to a maximum of 4 percent for banks that distribute credit for industrial development through downstreaming of both the mining mineral and non-mining mineral sectors (agriculture, livestock and fisheries).

Also read: Macroprudential Policy Direction

The dosage of sweet potion is increasing. Referring to the results of the Bank Indonesia Governor's Board Meeting on April 23-24, 2024, the monetary, macroprudential, and payment system authorities strengthen the Monetary Operations Strategy by expanding the scope of economic sectors that can taste the sweet potion.

The coverage of the economic sector targets the expansion of downstream sectors of mining and non-mining, housing, tourism and creative industries, as well as the automotive industry. According to BI's calculations, until the end of this year, the total liquidity incentives that banks can utilize will reach Rp 280 trillion.

The strengthening of liquidity incentives is a breath of fresh air for banking after BI provided bitter medicine in the form of increasing the BI Rate by 25 basis points to 6.25 percent. However, BI must take steps to increase the benchmark interest rate to remain consistent in maintaining economic stability (pro-stability). Even though the BI Rate rises, liquidity remains and is expected to continue to support economic growth from the impact of global spillovers.

Ardhienus, Deputy Director at the Macroprudential, Monetary and Market Surveillance Department, Bank Indonesia

ARSIP PRIBADI

Ardhienus