Curbing imports to cut deficit
The Jakarta Post
The government has announced several drastic measures to control imports in a concerted bid to cut the trade deficit, which has been the main driver of the increase in the current account deficit to as high as 3 percent of gross domestic product (GDP) in the second quarter.
Bank Indonesia (BI) has forecast that Indonesia’s current account deficit throughout this year may increase to US$25 billion from $17 billion as a result of the trade deficit and portfolio capital outflows. In fact, the overall balance of payments (including capital accounts) may turn into a deficit of $5-7 billion this year from a surplus of $12 billion last year. Outflows from the capital markets during the first half increased to Rp 49 trillion ($3.35 billion) from Rp 6.7 trillion a year earlier.
The Indonesian economy has indeed been more exposed to external funding risks because of the rising current account deficit. This external funding gap caused the economy to encounter tighter liquidity during the latest wave of capital volatility and put pressure on the rupiah.
The rupiah has been among the worst performers in Asia since the emerging-market sell-off began in late January, weakening about 8 percent to its lowest level against the greenback since 2015.
Capital flows out of the country are increasing as investors have sought better returns overseas since the United States Federal Reserve began its monetary tightening. BI has attempted to increase the interest rate differentials with the US by raising its benchmark interest rate to 5.5 percent. Hence, import controls are seen as among the most effective ways of reducing the current account deficit within the short term. But since more than 90 percent of total imports consist of capital goods and basic industrial materials, the focus of restrictive measures is on consumer goods and oil because fuel has so far been the main driver of the trade deficit.
Certainly, any import controls should be in compliance with the World Trade Organization’s rules. Therefore, instead of using tariff and non-tariff measures, the government pronounced a higher tax on imported consumer goods, notably those goods already locally produced. The government is also exploring the option of reducing crude oil imports by assigning state oil company Pertamina to buy all the crude oil produced by oil-mining contractors within the country and by increasing the biofuel (palm oil-based) content of biodiesel to 20 percent.
Unfortunately, the drastic policy-pronouncement seemed to have been misunderstood by the domestic business community because the technical details on the import controls have yet to be announced. The government seemed intent mostly on convincing the market that it really was about to enact some drastic measures to control the trade deficit, whereas all the measures remain half-baked.
The government is still reviewing which of the estimated 900 consumer items will be subject to the higher taxes. Worse still, the plan to buy all the crude oil produced by production-sharing contractors is simply a rough idea, which, if not adequately explained, could cause jitters among oil firms.
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