Resolve Deficit by Strengthening Structure

KOMPAS/ALIF ICHWAN

Bank Indonesia (BI) Governor Perry Warjiyo (center) together with (from right to left) Deputy Governor of BI Rosmaya Hadi, Mirza Adityaswara, Erwin Rijanto and Sugeng prepare to hold a press conference in Jakarta on Thursday (17/01/2019). The results of the Bank Indonesia Board of Governors Meeting decided to hold the benchmark interest rate at the range of 6 percent, fixed deposit rate at 5.25 percent and loan interest rates at 6.75 percent.

JAKARTA, KOMPAS -- The government needs to continuously strengthen the national economic structure amid global turmoil. Capital inflows have not been enough to narrow the current account deficit, as numerous components have led to the deficit, including the trade balance, which reached a record deficit of US$8.57 billion last year.

Deputy of macroeconomics and financial coordination Iskandar Simorangkir of the Office of the Coordinating Economics Minister said in Jakarta on Friday (18/1/2019) that Indonesia remained dependent on foreign capital inflows, especially portfolio investments, as domestic savings were insufficient. This situation leads to a significantly negative savings investment gap.

Currently, almost all components in the current account are in deficit, including the services balance, the trade balance and primary revenue in the form of foreign companies’ profit repatriation. The largest deficit came from primary revenue, which reached negative $8.02 billion in the third quarter of last year. Meanwhile, the secondary revenue surplus was relatively small at $1.8 billion.

Bank Indonesia data show that the current account deficit in the first three quarters of 2018 reached $22.4 billion, much more than the $17 billion in 2016 and $17.33 billion in 2017.

Iskandar said the government would boost exports and reduce imports through goods substitution to improve the trade balance. However, its implementation depends greatly on global economic conditions.

Asian Development Bank (ADB) economist Eric Alexander Sugandi said that evaluations of export-boosting policies should not be limited to quantitative achievements. Despite increasing exports, imports have increased much faster, which deepened the deficit in the fourth quarter of 2018. Global economic uncertainty is no excuse as the deficit has been a chronic problem.

Statistics Indonesia (BPS) data show that imports reached $188.6 billion in 2018, 20.2 percent higher than in 2017. Meanwhile, exports grew by only 6.7 percent.

“We need to apply a comprehensive approach. Tariff incentives are a short-term solution while deficits are a long-term problem,” Eric said.

Oil and gas imports can only be resolved by building new refineries and mass transportation. This year, export challenges remain huge. Imports will have to be slowed down to ensure a surplus trade balance.

Portfolio investments

The World Bank in its 2018 quarterly report on Indonesia’s economy highlighted structural reforms to accelerate exports and foreign investments. Slow export growth and limited foreign direct investment have led to Indonesia becoming highly dependent on portfolio investments.

Bank UOB Indonesia chief economist and researcher Enrico Tanuwidjaja said the government should focus on attracting foreign direct investment, instead of portfolio investments that can be pulled out at any moment.

Foreign direct investment is necessary to build an export industry with added value. Without foreign direct investment, export growth will be difficult to achieve. (KRN)