SIM REPORT SOUTH & SOUTHEAST ASIA, ISSUE 5

INDONESIA: Efforts to rebalance economy derailed by coronavirus

The coronavirus (COVID-19) pandemic has profoundly shaken global economic assumptions and rendered virtually meaningless plans, calculations and strategies viewed only a few weeks ago as the mechanisms intended to support ambitious administrative and physical infrastructure programmes.

Indonesia has been particularly affected by this dramatic and still evolving health and economic crisis as a combination of official insouciance and systemic operational weakness has left the nation highly exposed to the pandemics damaging and long-lasting impact.      

COVID-19 manifested itself in Indonesia as President Joko Widodo was preparing to undertake a domestically controversial programme intended to reform key economic areas such as labour rights and foreign investment, generally referred to as the ‘omnibus bill.’ Opposition to the proposed legislation by organised labour groups had already led to large but peaceful protests, with the implicit threat that failure to either amend or abandon key elements of the bill could result in far more destabilising action.

Along with almost all previous calculations and plans regarding the Indonesian government’s economic priorities and structural reforms, the omnibus bill has been sidelined at least until a degree of stability returns to the country and the extent of the damage wrought by the pandemic can be fully assessed.  At the most optimistic this could take many months as other priorities claim the attention of the government and national resources. Of particular concern is the failure of the government to either develop or communicate a coherent strategy for countering the virus that could, according to some independent modelling, see Indonesia become a global COVID-19 epicentre with untold social as well as medical and economic consequences.

Indonesia’s economy began this year already weakened by slowing global growth with GDP expanding by 5.02 per cent in 2019, its slowest rate since 2015 and below the government’s 5.3 per cent target. The speed of COVID-19’s spread quickly disrupted the country’s economic, political and social systems and overturned many of the metrics and projections made prior to the outbreak. The recent plunge in oil, natural gas and other mineral commodity prices, with little indication of when they may recover, has also seriously eroded government revenue assumptions.

In response to these multiple threats and challenges the government unveiled a series of measures intended to protect local economic activity while seeking to maintain social stability. The most recent, announced by the government on 13 March, involved the allocation of IDR120 trillion (USD8.1 billion) from the state budget to stimulate the economy through tax incentives and subsidies for workers, businesses and families affected by COVID-19.

Key elements of the stimulus package included waiving raw material import taxes for selected manufacturing industries, a six-month 30 per cent cut in corporate tax rates and a six-month tax holiday for manufacturing workers with annual incomes below IDR 200 million (USD12,674). In order to meet this additional expenditure Finance Minister Sri Mulyani Indrawati announced on 13 March the budget deficit will be increased to 2.5 per cent of GDP, or IDR432 trillion (USD27.733 billion). To date there is no indication these measures will be sufficient to protect the country from the onset, course and, just as important, the aftermath of the pandemic.

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