The government forecast economic growth of 4.5 to 5.5 percent in 2021. To achieve it, Indonesia needs a significant booster.
ONE of the responsibilities of the government is to keep hope alive in the middle of the economic damage caused by the Covid-19 pandemic. However, projecting that the Indonesian economy, or gross domestic product (GDP), will grow at 4.5 to 5.5 percent in 2021 feels like pie in the sky. In the second quarter of this year, the economy contracted by 5.32 percent, the worst figure since 1998 when Indonesia and Asia were struck by the monetary crisis.
President Joko Widodo conveyed this optimistic outlook at annual session of the House of Representatives and People’s Consultative Assembly on August 14. It will not be easy for the government to push the Indonesian economy to grow almost twice as fast next year. Even without the pandemic, the Indonesian economy has been slowing down since the first quarter of 2018 when it still grew by 5.27 percent. Since Jokowi came to office, the Indonesian economy has only grown by around 5 percent.
The Covid-19 pandemic has wrecked the economy of Indonesia and the world. China, which has been long been a barometer of the global economy with an average growth above 6 percent or even above 8 percent in the period before 2012, slumped by 6.8 percent in the first quarter of 2020. In the second quarter, China recovered to 3.2 percent growth. Workers returned to the factories because exports of computers and smartphones rose by 9 percent when people began working from home.
Indonesia clearly needs something to strongly boost the economy so that it can escape from the crisis caused by this pandemic, as happened in China. However, if we look at the GDP by economic sector, Indonesia needs a miracle if it is to find such a booster. Of the five economic sectors that provided a combined contribution of more than 65 percent to the GDP, only agriculture, forestry, and fisheries saw positive growth. The manufacturing industry, construction, trade, and mining and excavation sectors contracted.
With this state of affairs, it is no surprise that domestic consumption in GDP expenditure also saw negative growth. As a result of the pandemic, many businesses have gone bankrupt or have either laid off or fired workers. Government incentives, both direct in the form of cash, and indirect for the business world have yet to show any positive impacts.
One of these is tax incentives for businesses. From the total tax incentives of Rp120.6 trillion, realization has only reached Rp16.6 trillion, or 13.8 percent. Overall, the realization of the National Economic Recovery Program as of the first week of August was Rp151.3 trillion, or 21.8 percent of the Rp695.2 trillion maximum. Realization of a number of direct cash assistance programs is on average less than 50 percent.
Indonesia does have an extraordinary experience when it was able to restore an economy which had contracted by 13.1 percent in 1998 to growth of 0.8 percent the following year. Then it was the manufacturing industry that revived and quickly became the driving force for economic growth. Domestic consumption and government spending also pushed economic growth from the expenditure side. That year, the people did not suffer as much from the economic downturn.
The question now is which sector will be able to become the economic booster for Indonesia. The test will be seen in the third quarter of 2020. If it is able to revive the economy, Indonesia will step back from a recession—defined as two consecutive quarters of negative growth. Conversely, if there is a recession, the government’s optimism about 2021 will turn out to be no more than a dream.