Saving the Economy
The government needs to immediately propose a revised 2020 State Budget as a guideline to minimizing the economic impacts of the coronavirus.
THE government must not repeat the mistakes it made in the early days of the Covid-19 pandemic: taking too long and giving the impression of underestimating its seriousness. The Indonesian economy, which has been in decline since the coronavirus pandemic started, needs correct and comprehensive solutions.
The coronavirus has clearly dealt a severe blow to the economy of Indonesia. The share index at the Indonesia Stock Exchange is 33 percent down compared with the start of 2020, its lowest level since 2015. The exchange rate of the rupiah to the US dollar has slumped to Rp16,273, the weakest since June 1998. Foreign investors in the money and capital markets continue to withdraw their funds from Indonesia. This state of affairs is not yet improving because the coronavirus continues to spread in Indonesia. The number of cases and victims is still increasing.
The prognosis of Australian National University economists Warwick McKibbin and Roshen Fernando in a research paper entitled The Global Macroeconomic Impacts of Covid-19 clearly shows the extraordinary depth of the crisis. The economic impact of the coronavirus will be far worse than that of the 1918-1919 Spanish flu, the deadliest pandemic in history, which killed 40 million people around the world. It is estimated that the economic cost of corona could reach US$2.4 trillion, compared with the SARS outbreak in 2003 that cost the global economy US$40 billion.
These two economists have come up with seven scenarios based on the spread of corona, the number of cases and the number of deaths. Scenarios 1 to 3 assume the virus is confined to China and is only a short term outbreak. In scenarios 4 to 6, corona spreads around the world but is still not long lived. In scenario 7, the coronavirus spreads throughout the world and smaller scale pandemics break out in following years. They produced prognoses based on five shock factors, the supply of workers, the equity risk premium, production costs, consumer demand and government spending.
In Indonesia, according to the study, the supply of workers falls, the equity risk premium and production costs both rise, demand falls and government spending rises. Based on this simulation, the two researchers estimate that Indonesia’s economic growth in 2020 will fall by 1.3 percent in scenario 4, 2.8 percent in scenario 5, 4.7 percent in scenario 6 and 1.3 percent in scenario 7. In the 2020 State Budget, Indonesia targeted economic growth at 5.3 percent. In scenario 4 alone, Indonesia’s economy would contract by 4 percent.
Given these scenarios, Indonesia’s economy in 2020 and the next few years is highly dependent on how the corona pandemic is handled. The longer it takes to deal with it, the more it will spread and the greater the number of victims. As of Monday, March 23, 49 people had died as a result of Covid-19. Although this figure is far below the 647 predicted by scenario 4, the government should work hard to make sure that the number of deaths does not reach this level.
President Joko Widodo has already announced three main programs, the reallocation of funds and a focus on health (coronavirus), a social safety net, and protection for micro, small and medium-sized businesses. But speeches alone are clearly not enough. The government needs to speed up its proposal for a revised 2020 State Budget and push the regions to do the same. If this is not done soon the government will only be able to use emergency funds, which total Rp5 trillion.
The revision to the state budget could begin by reducing the Rp423 trillion allocated to infrastructure spending. The program to build a new capital city could be delayed, as could the construction of five super priority tourism destinations. These funds could be reallocated for health spending, especially for tackling Covid-19. This reallocation could also be aimed at the social safety net and protection for micro, small and medium-sized businesses. Another problem that will arise soon is a huge rise in people being made redundant.