Facing of Recession
There must be no attempts to cover up the economic crisis. It is time to accelerate the direct cash assistance program.
WHEN responding to an economy hit by recession, the government must choose strategic measures. A recession is clearly not good news, and this cannot be obscured by the rhetoric of “the economy is starting to improve”—simply to calm the markets and the public.
The Indonesian economy is in recession after two consecutive quarters of negative growth. In the third quarter of this year, as announced by the Central Statistics Agency on November 5, economic growth was minus 3.49 percent. In the previous quarter it was minus 5.32 percent.
As in many other countries, the Indonesian recession is a result of the Covid-19 pandemic. The unavoidable large-scale social restrictions policy to protect public health has had a negative impact on the national economy. People have reduced their consumption, the demand for goods and services has plummeted, companies have closed, there have been layoffs, buying power has collapsed and companies still in business have been closing one by one—an inescapable vicious circle.
Although indications of recession were apparent before the second quarter of 2020, there were still officials who viewed the warnings of recession as mere paranoia. Some played it cool: after the economy started to decline, at the beginning of November Coordinating Minister for Maritime Affairs and Investment Luhut Binsar Pandjaitan said that Indonesia was beginning to come out of recession.
It is true that the negative growth of the Indonesian economy in the third quarter is not as bad as the previous quarter. But it is too early to say that we have emerged from the depths of the crisis. It is important to remember that although it is important to create optimism, this does not mean that we should lie to ourselves. Denial will only make the government and the people indifferent.
The government should immediately draw up a rescue strategy. Because the recession was triggered by the fall in consumption, government policies must be directed towards improving people’s buying power. Instead of trying to help through the Pre-employment Card—which has proved to also benefit several digital training platforms—the government should increase direct cash assistance. Aid in the form of goods, for example distribution of staple food and groceries, has proved to be ineffective and only benefits producers and suppliers of these goods.
Moreover, the government needs to look at the size of the budget allocation. The 2021 State Budget, which was approved on September 29, sets government spending at Rp2,750 trillion, an increase over the previous year’s figure of Rp2,540.4 trillion. The economic growth target for 2021 is 5 percent, only a little lower than last year’s target of 5.3 percent. However, one fact that cannot be denied is that in the last five years, the government economic growth targets have not been achieved.
At a time of crisis, setting targets too high can be counterproductive. The problem is that economic growth needs capital and capital needs income. Income obtained from debt will in turn burden next year’s budget. In the 2021 State Budget, the deficit is set at Rp1,006.37 trillion, or 5.7 percent of gross domestic product. Even before Covid-19, the budget deficit was bridged by borrowing.
Finance Minister Sri Mulyani is optimistic that the crisis will soon be over. In the fourth quarter of this year she claims that the government will accelerate the realization of state spending in the center and in the regions, which totals Rp1,200 trillion. The government also hopes that a vaccine will soon be available and will trigger economic growth.
Although it is not a bad thing, we must be cautious about the finance minister’s optimism, especially concerning the target of realization of state spending. What has happened to date is that utilization of state funds has proceeded very slowly as a result of ineffective bureaucracy and poor coordination between institutions.
The hope that the vaccine will end the pandemic also should not be overstated. Epidemiologists have warned that even when the vaccine does become available, it will not immediately end the contagion.
In other words, the road ahead is still rocky. The economy will not immediately recover, especially if the government loses its focus and its policies continue to be undermined by the short-term interests of a small number of people.