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President Jokowi's economic package: A second round with more 'kicks'?
After his first economic policy package received an unenthusiastic response from the market, President Joko âJokowiâ Widodo announced his second deregulation package on Sept
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fter his first economic policy package received an unenthusiastic response from the market, President Joko 'Jokowi' Widodo announced his second deregulation package on Sept. 29.
This time the responses were mixed. The Jakarta Composite Index moved into the green after being battered in the red for several days. But the business community felt the second package would have little impact on existing business.
The package included interest tax cuts for exporters, fast-track business licensing for major investments in industrial estates and relaxation of taxes for imports of capital goods and the aviation industry.
Investors intending to invest a minimum of Rp 100 billion (US$6.9 billion) and who plan to employ more than 1,000 workers in industrial estates will be able to secure a principal business license, a notary deed of company establishment and corporate tax registration number (NPWP) within just three hours.
The three-hour time frame, if it can be implemented as planned, would be something revolutionary for the government bureaucracy although it is common in other countries. It would also show that a radical improvement in bureaucracy is possible if there is a political will to do it.
Other significant changes have also been implemented in licensing systems for infrastructure projects. The government has simplified permits for power plant building where the number of permits required is now 25 permits, coming down from 52 permits, with the processing time down to 256 days from 923 days.
As the overall permits include some from regional administrations, the challenge would be local administrations' ability to follow central government steps to execute radical changes in their bureaucracy.
It is doubtful that in matters of land acquisition that still fall under local administrations' jurisdiction they could speed up the licensing process.
But licensing is only part of the overall factors that would be used by investors to make decisions. Investors would also look at other factors such as the availability of electrical supply, other infrastructure and legal certainty especially related to industrial relations.
On trade policy some measures would be taken to ease some regulations to improve the competitiveness of domestic industries. Tariff and non-tariff barriers have been lowered for several products namely tires, cloves, machinery, chemicals and horticultural products.
Realizing the crucial role of transportation, the government has scrapped value added tax for imported aircraft and its related components. Also the railway car and ship building industries would get benefits from lower import tariff for components and parts.
Bank Indonesia's (BI) fight against the rupiah depreciation continued through this second package by introducing a set of measures intended to stabilize the country's beleaguered currency which tumbled to its lowest levels since 1998 in the third quarter.
The government slashed income tax on the interest of rupiah and dollar time deposits at local banks which are derived from export earnings. The tax on the interest on such deposits was even waived for funds which are put in local banks for more than six months.
BI's key steps include the planned issuance of BI certificates in foreign currency and intervention in the forward market for the rupiah.
BI intervention is currently limited in the dollar spot market. But more companies are starting to hedge their foreign currency denominated debt in the face of the depreciating rupiah resulting in more activities in the forward market that is being plagued with uncertainties and volatilities.
By intervening in the forward market, BI could instill some measure of control and order by ensuring a greater supply of dollars to meet any increase in demand and so could ease pressure on the rupiah, although these steps could be risky for BI reserve.
However, because movement in the forward market could create expectations for future depreciation, for BI this should be a venture worth risking. Another problem faced by BI is how to deal with excessive short-term liquidity that could lead to more speculation in the foreign exchange market.
Amid a slowing economy and volatilities in the financial market, companies and fund managers prefer to hold their liquid assets in cash. BI has to attempt to drive these short-term instruments into long-term instruments.
Whether it would succeed depends on the attractiveness of the three-month BI certificates and the two-week reverse repurchase agreement that BI plans to issue.
The rupiah's value in US dollars has fallen 17 percent so far this year. But this is not unique to the rupiah because other currencies have also suffered severe drops in their dollar value like the euro (-17 percent), Japanese yen (-18 percent), Australian dollar (-21 percent), Mexican peso (-20 percent), Brazilian real (-35 percent) and Russian ruble (-45 percent). The depreciation of those currencies was severe and the situation could be worse if the US Federal Reverse raises its interest rate later this year. Under these circumstances it would be hard to expect that the BI measures would have an immediate impact on the rupiah.
Efforts to increase dollar supply should not overlook the importance of migrant worker remittance, which has made a large contribution to the foreign exchange reserve of many countries. Last year, according to the World Bank, India received $70 billion from the remittance of its migrant workers, the Philippines $28 billion and Vietnam $12 billion.
It is a shame that Indonesia only received $9 billion from remittance of its 6 million migrant workers or only 0.9 percent of gross domestic product (GDP), compared with 9 percent GDP for the Philippines from its 12 million migrant workers.
The management of Indonesian migrant workers has been a mess for a long time. It has been operating in an environment of corruption and collusion between government officials and companies that send migrant workers.
It is time to reform the management of sending migrant workers if the government wishes to boost its supply of dollars. The reform should focus on the current licensing system, recruitment, training and placement.
President Jokowi said he hoped the second-round policy package would have more 'kicks' compared the first one. But then he also said that he would announce the third and last round of his policy packages sometime this week.
He has to make sure that by that time he will really kick off the economy to start rolling again.
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The writer is a commissioner at a publicly listed oil and gas service company. The views expressed are his own.
