Fix the roof while the sun is shining. This advice is relevant in the event when external pressures such as those caused by the increase in the interest rates of the United States’ central bank, the Federal Reserves, have begun to subdue. Throughout 2018, there was a large fund outflow due to the increase in the Fed\'s interest rates. Bank Indonesia (BI) responded with an increase in its benchmark interest rates by 1.75 percent in total. Entering 2019, financial pressure has begun to ease. BI’s board of governors meeting in February decided to maintain the benchmark interest rate at 6 percent. It is now the best time "to repair the roof and pillars of our house".
If the pressure on the financial sector has begun to decline, pressure on trade is on the rise. In January 2019, the trade balance deficit was quite large, reaching US$1.16 billion. Trade pressure has continued to intensify since mid-2018 this year. According to Statistics Indonesia (BPS), the trade balance suffered a deficit of $8.57 billion in 2018, the worst performance since 1975. The trade balance has been under pressure due to a rising deficit in oil and gas trade and the increase raw and intermediate good imports over the last three years.
In the economy, a strength at the same time can be a weakness. One of our strengths in facing the slowdown in global economic growth is the role of domestic spending, which accounts for around 55 percent of gross domestic product (GDP). However, because raw materials for the production of a number of consumer products cannot be produced domestically, imports surge, especially food and energy. The same goes for investment and infrastructure development in the last three years. This situation shows the urgency of fixing the supply chain of the entire domestic industry.
Structural transformation
In the short term, the easiest mitigation is to reduce imports through policies, such as the measures taken by the government to impose import duties on 1,147 imported products and to delay strategic infrastructure projects with high import content. However, the policy has a negative effect, namely a slowdown in the economic growth. The structural transformation should, therefore be, oriented toward increasing economic competitiveness on all fronts.
In 2018, the service balance deficit totaled $7.1 billion, while the balance of primary income deficit reached $30.4 billion. According to BI, the current account deficit reached $31.1 billion in 2018 or 2.98 percent of GDP. The current account deficit shows that we are still dependent on external resources to drive the domestic economy. The external supply is still needed, not only goods but also services and capital. How can we get out of an external trap?
All transactions with external parties are included in Indonesia’s balance of payments, which suffered a deficit of $7.1 billion in 2018. In comparison, the balance of payments recorded a surplus of $12 billion in 2015 and another $11.5 billion in 2017. In 2019, interest rates are not expected to rise (much), but the trade war will likely continue. To anticipate this external pressure, there are four ways to get out of the external trap.
First, restructuring export-oriented domestic industries. In 2016, non-oil and gas exports in the general merchandise category reached a total of $130 billion and in 2018, the amount rose to $161 billion. Non-oil and gas imports rose, relatively at the same proportion, from $110.6 billion to $149.9 billion in the same period. Although the non-oil and gas trade balance still enjoys a surplus, it is necessary to make an extra efforts to carry out a rapid and massive restructuring in the export-oriented non-oil and gas industry.
Second, developing a domestic industry that can substitute imported raw and supporting materials. The trade balance in the category of general merchandise still records a surplus, albeit small. However, in other categories of goods, we are weak. In 2016, imports of other goods category totaled $792 million, but in 2018 it surged to $2 billion. The rise occurred because since the last three years we have imported raw materials for infrastructure development.
Developing an industry to substitute imported raw materials is one of the keys for us to grow further. Fiscal incentives are needed so that domestic and foreign investors are interested in the processing industry, which requires large capital, expertise and high technology, and a strong global supply chain.
Third, the restructuring of oil and gas trade. Although oil and gas exports continue to rise, the increase in imports is far greater. In 2016, oil and gas exports totaled $12.9 billion, while imports reached $17.6 billion. In 2018, oil and gas exports rose to $17.6 billion, while imports surged to $29.2 billion.
Increasing local components in fuel through the increase of palm oil content in diesel fuel from 20 percent (B20) at present to 90 percent (B-90) in the next few years is a good strategic step. However, there is another step that can be taken, namely acquiring oil companies abroad to meet domestic needs. The oil supply from companies abroad will be recorded as government revenues, not as imports.
Fourth, accelerate the restructuring of the tourist sector. Revenues from personal, cultural and recreational services in the balance of payment have increased significantly in the last few years. The surplus in this sector, which totaled $36 million in 2016 rose to $278 million in 2018. The main contributor was the surge in the foreign exchange income from foreign tourists of $15 million in 2018 from $12 million in 2016.
Fixing the tourism sector should become an indicator of structural transformation oriented toward the improvement of competitiveness.
Fifth, efforts to get out of the external trap must be the focus of the next government, whoever the president is. Now, it\'s time to promote the awareness on the need to carry out structural transformation in a systematic and sustainable way. Opportunities are still available and wide open. However, all that must be done with real work, not just talk. (A. PRASETYANTONO, Lecturer at Atma Jaya Catholic University Jakarta)