An Optimism that Might Go Up In Smoke
Yopie Hidayat (Contributor)
AS we welcome 2021, there is optimism that the Indonesian economy will recover. Projections from various reputable institutions show that economic growth will be positive once again. The government even set a five percent target.
It is quite a realistic projection. The Indonesian economy has shown signs of recovery in the last quarter of 2020. Manufacturing activities have started expanding again. That is reflected in the IHS Markit Purchasing Manager Index Indonesia, which reached 50.6 as of November. A PMI higher than 50 means expansion. As a comparison, on April, the PMI collapsed to 27.5 as many industries ceased production due to weak demand.
Unfortunately, that recovery prospect now is in danger. A new and more sinister wave of Covid-19 is rampaging the world. If no action is taken to stop the pandemic from raging on, it is impossible for the economy to recover. If the government decides to implement stricter social restrictions, the economy will move slowly. No matter the choice, the pandemic will hinder the progress of growth.
There is another way to overcome the pandemic besides tighter lockdowns: vaccinations. Indonesia is ready for vaccination this month. The government has taken the right step in making the vaccine available for free to all citizens. However, one key question remains when calculating the effects of vaccination on the economy. When will the vaccination create herd immunity, an ideal conditions for economic recovery?
Let us examine it more carefully. Until the end of Q1 2021, the only vaccines available here is Sinovac. Three million doses are ready to use. The rest will come in bulk. The supply of viable Sinovac vaccines will only go up by early Q2 2021. On April 2021, other vaccines will come in batches. If there are no new and more progressive policies, it seems unlikely that the vaccination program will reach enough of the population to achieve herd immunity by the end of 2021.
As a result, at least until October 2021, economic activities will not be fully free of restrictions. Varying degrees of activity limitation, especially in terms of human mobility, will still spoil the first nine months of 2021.
When the economy's movements are still limited, stimulus from the government is crucial to keep the economy going. Without stimulus injections, the economy can go back in a slump. And here lies a serious problem. The government’s fiscal capacity is being increasingly compromised. In the 2021 budget, there is already a Rp1,000-trillion deficit, as the government has allocated a sizable amount of the budget for various social aid and pandemic response programs. It seems impossible for the government to add even more stimulus.
The limited fiscal capacity is a consequence of the increasing government debt last year. Throughout the first 11 months of 2020, the government has taken on new debt amounting to Rp1,065 trillion, a sharp increase from 2019 which only added Rp443 trillion in debt. As a result, interest payments have risen dramatically. This year, Rp373.3 trillion of government funds will go for interest payments, growing by Rp100 trillion compared to the 2019 figure of Rp275.5 trillion.
Interest expenses cannot be manipulated. However, the government still has chances elsewhere to set aside funds from other, less urgent budgets to add to the stimulus. For example, The Rp137 trillion budget for the ministry of defense can clearly be cut. Purchasing weaponry is not an urgent matter when the country is suffering from a pandemic. In fact, this budget is far higher than the budget for the ministry of health, which sits at a mere Rp84.3 trillion. Besides, weapons expenditure will not have much impact for economic recovery, because it mostly consists of imports.
It is clear that the government must muster the nerve to take on alternative policies in budget management and pandemic response. If everything proceeds in a kind of business-as-usual approach, the optimism of recovery in 2021 will immediately go up in smoke.