A Back Alley to Avoid Economy Contraction
AS it turns out, Covid-19’s toll on the Indonesian economy exceeds many analysts’ expectations.
Even the government got it wrong. At the end of Q1-2020, the economy only grew by 2.97 percent year-on-year, much lower than government’s estimate at 4.6 percent. It is really shocking since the Covid-19 pandemic just affected Indonesia in the last month of the first quarter. Yet, its impact was already so severe.
This is clearly a terrible signal. The negative effects of Covid-19 on the economy throughout Q2 of 2020 will certainly run deeper. Until last week, four provinces and 22 cities have implemented Large-Scale Social Restrictions (PSBB) to slow down the outbreak. As a result, economic productivity has dropped sharply, many workers have lost their income, and eventually, economic growth will fall. The government estimates that in the worst case scenario, the economy can contract by 0.4 percent in 2020.
So far, the government has been trying its best to support the economy and prevent it from reaching such low figures. A response already in motion is a massive budget reallocation to fight the pandemic. In total, the government has prepared a Rp405 trillion worth of ‘ammunition’ of new budget. This money will go through various programs.
The government has already given tax and other stimuli to businesses. There are also some schemes to prevent the collapse of the financial industry. A large number of failed businesses can create a surge of non-perfoming loan. The spike in unemployment also might turn many kinds of consumer credits sour, such as mortgages and automotive loans.
There are also various social aid programs for the poor, including some additional direct cash transfer. It can inject some purchasing power boost to the poor. At least, they still can meet their basic needs. Consequently, consumption levels will not drop severely. Thus far, consumption has been an important component of Indonesia’s economic growth. If the government can boost household consumption, there will be a push to keep the economy rolling.
The problem is, mere stimuli seem insufficient to crank up the economy. Some social aid program implementations, for instance, are ineffective due to misallocations caused by data errors. Other program, such as pre-employment training program or Pra Kerja, seems ineffective in helping the newly unemployed people.
Meanwhile, the government is also limited in its financial capacity. Additional stimulus means additional government debt. If government debt swells out of control, an even bigger problem will arise. Once government’s credibility is dented, a lower credit rating for Indonesia will follow. This will end up in a downward spiral of the economy.
The only other option for the government to avoid the economy calamity is to take a back alley to cut through the jam: immediately reopening the economy back to normal, although not as normal as before the outbreak. The government has planned a scenario. Starting from June, businesses will be gradually allowed to reopen.
Ideally, the decision to reopen the economy should be based on data and facts which signify that the outbreak is truly over. But those ideal conditions are hard to fulfill. There has been an effort to increase the number of tests. However, that is still not enough to support an unquestionable policy based on data.
Around the world, similar debates are going on. Everyone wants the economy to return to normal soon. Impatient financial markets have mostly placed their bet that many countries will soon reopen their economies. Slowly, the doom and gloom has disappeared from markets everywhere. Optimism has bloomed.
The Indonesian government must now make that decision quickly. Certainly, there is a very high risk that normalizing the economy might invite the second wave of the outbreak. But letting the economy contracted to negative growth also holds an unbearable consequences. The essence of public policy making is indeed careful consideration of whether the benefits outweigh the costs. This time, the government must do it while steeped in uncertainty.