Stimulus and Coordination
The Covid-19 pandemic has devastated the world economy. The bad condition of the global economy due to Covid-19 has caused a rapid reaction from all world leaders.
The Covid-19 pandemic has devastated the world economy.
Most economic indicators have deteriorated significantly. World trade (exports and imports), manufacturing production, use of production capacity, retail sales, consumer confidence, unemployment, commodity prices and many other indicators are almost uniformly in the acute severity stage. It is evident that economic growth in several countries experienced a very deep contraction in the first quarter of 2020.
The most severe contraction was experienced by China with growth of minus 6.8 percent, the worst in the history of China\'s economy in the last three decades. In Europe, France and Spain minus 5.4 percent and minus 4.1 percent, respectively. In ASEAN, Singapore, which was highly exposed to international trade minus 2.2 percent. This condition was worse than the beginning of the 2008 global crisis. Countries still able to grow were the United States (0.5 percent) and South Korea (1.3 percent), but both saw significant contraction from the previous quarter and quarter I-2019.
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The bad condition of the global economy due to Covid-19 has caused a rapid reaction from all world leaders. The governments and monetary authorities are competing to provide high doses of fiscal and monetary stimulus. This shows that the negative effect of Covid-19 is seriously damaging the arteries of the economy. The absence of a vaccine has created much more uncertainty than the 2008 global crisis. No one can be sure as to when, how severe and how strong the world will be able to stand. Some argue that the recession this time will be like the Great Depression of 1930, even worse.
The ability of experts in economy and modeling/econometrics is truly being tested. From forecasts, it proving very difficult to quantify the negative impact of Covid-19. These limitations and confusion have caused predictions of the global economy to be in a very wide range, minus 3 percent to minus 1 percent.The form of world economic recovery is very difficult to imagine and predict. No one can answer convincingly. There are so many patterns of economic recovery, V-shaped (recovering fast), U (slow), L (slower), and W-shaped (recovering then falling again in a recession). The results of a Reuters poll of 165 world economists from 1-23 April, most (56 percent) believe the recovery of the world economy follows the U-shape: it is slow and may not be completed this year. We must be prepared for the worst condition and must have long breath and endurance, like a marathon runner.
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Fiscal and monetary stimulus
Therefore, it is very natural that monetary and fiscal stimulus, especially from developed countries, flush the economy with numbers that are fantastic and astonishing because of the difficulty of predicting how badly the Covid-19 pandemic is undermining the global economy. The benchmark interest rate has been lowered aggressively in a number of countries. In developed countries where inflation is very low, the benchmark rate is near zero, even negative: Japan (minus 0.10 percent), the euro zone (minus 0.50 percent), Denmark (minus 0.75 percent), Switzerland (minus 0.75 percent). That means that the nominal value of money in savings is increasingly eroded. Because of low interest rates, real interest rates are negative in most countries (negative investment returns).
Likewise, the European Central Bank\'s QE recorded 0.4 trillion euros vs. 0.5 trillion euros in 2008, Japan\'s central bank 21.1 trillion yen vs. 11.5 trillion yen in 2008.
This low interest rate is apparently not strong enough against the Covid-19 pandemic. The central banks also flood the economy with money circulation through the unconventional monetary policy, namely quantitative easing (QE). This was done in the era of the 2008 global recession, but now it is far different, the scale is much bigger and very aggressive. QE The central bank actually prints new money, according to Milton Friedman (1969) known as helicopter money. QE conducted by the US central bank (The Fed) rose very significantly this year, until 10 April reaching US$1.92 trillion, far greater than 2008 which amounted to $1.35 trillion. Likewise, the European Central Bank\'s QE recorded 0.4 trillion euros vs. 0.5 trillion euros in 2008, Japan\'s central bank 21.1 trillion yen vs. 11.5 trillion yen in 2008.
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Aggressiveness also occurs in fiscal policy. Japan is the most expansive with fiscal stimulus reaching 20 percent of GDP, followed by Malaysia 17 percent, Australia 16.4 percent, Singapore 12.0 percent, US 11.0 percent. Basically, the world is all out using weapons and ammunition to combat this pandemic. Indonesia does the same, even though the amount is not as fantastic as the developed countries. In my opinion, with the existing state budget (APBN) and monetary capacity, Indonesia can be said to be aggressively limited, plus anticipatory, and adaptive to maintain a very depressed economy due to the pandemic.
Bank Indonesia has relaxed its monetary and macroprudential policies: (1) lowering the benchmark interest rate (BI7DRR) from 5.00 to 4.50 percent, (2) cutting rupiah and foreign exchange reserves, (3) daily FX swap auctions, (4) terms repo with underlying government securities (SUN/SBN), (5) foreign currency term deposits for market liquidity, (6) easing macroprudential intermediation ratio, and others. The Financial Service Authority (OJK) also launched stimulus for banks: (1) relaxation of credits/financing/funding requirements for MSMEs, (2) MSME credits/financing restructuring.
Meanwhile, the government has three priority focuses to sustain the economy and society: (1) providing funds for health care, (2) channeling social security assistance, and (3) no less important, providing economic stimulus/support to the business world.
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Considering the huge cost to overcome Covid-19, the government has made a refocusing/budget savings of around Rp 150 trillion and reallocation of Rp 55 trillion in expenditure. Until now, the government has implemented fiscal stimulus I (strengthening the domestic economy) and II (maintaining people\'s purchasing power and facilitating exports and imports) of Rp 8.5 trillion and Rp 22.5 trillion respectively. It has to be admitted that stimulus I and II are relatively small because in Indonesia at that time Covid-19 had not been detected.
However, then its transmission has become increasingly widespread and massive, and was responded with stimulus III with a much larger value, Rp 405 trillion. This anticipatory and adaptive step is legally protected through Regulation in Lieu of Law (Perppu) No. 1/2020, where the fiscal deficit can be above 3 percent of GDP for three years, until 2022.
However, this is not the only condition for Indonesia\'s success in overcoming the pandemic.
To help the national economy which is heavily affected by Covid-19, it takes courage to loosen aggressive monetary policy and fiscal policy which is very expansive. However, this is not the only condition for Indonesia\'s success in overcoming the pandemic. One thing that is very important and should not be neglected is the coordination and harmonization of each policy being taken. Without good and smooth coordination and harmonization between the central government, regional governments, monetary authorities, Supreme Audit Agency (BPK), House of Representatives (DPR), banks, business people, and the public, any amount of money to be channeled will be felt useless and wasteful.
The Finance Ministry, BI, OJK, and Deposit Insurance Corporation (LPS) should be a clear example of the solidity of coordination and harmonization within the Financial System Stability Committee (KSSK). Furthermore, it is also ensured that there is good coordination between ministries/institutions, central and regional governments so that this stimulus truly has a positive impact on the entire economy and can be felt at the lower and poor levels of society.
Coordination from all lines should not result in decisions and executions to be slow because we need fast action. The people don\'t want to wait, the economy which is sluggish must get immediate stimulus injections. Policies and stimuli must be in one spirit and soul. It is important to bring up the level of confidence of all levels of society that this pandemic will end soon and we are all winners, not losers. Positive psychology can be very powerful and it may be cheaper to deal with this pandemic. Amen.
Anton Hendranata,Ekonomist of PT Bank Rakyat Indonesia Tbk