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Wanted: A down-to-earth economic policy package
Less is more
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L
ess is more. We've heard the phrase said and it is the case with economic stimulus packages. The second package announced by the government on Sept. 29 included a smaller number of measures, but more substantial ones, than featured in the first package on Sept. 9 that saw the cancelation or revision of almost 90 regulations ' many deemed unnecessary or inimical to business.
But while the recent economic policy packages serve as a good foundation for the future of the country's economy, especially the supply side, Indonesia urgently needs more down-to-earth policy measures that will directly strengthen people's purchasing power, encouraging them to spend more and providing a catalyst for businesses to expand and for market demand to be reinvigorated.
These, hopefully, will be included in the third package, scheduled to be launched this week.
To sum up the previous two economic policy packages, the first one placed emphasis on deregulation, erasing a number of rules that were seen as bottlenecks to investment and propping up the rupiah by, for example, relaxing requirements for foreigners to open bank accounts here and overhauling some auction methods for term deposits and government-bonds reverse repurchases.
Meanwhile, the second batch of economic policy revisions also aimed to cut red tape and boost investment, though its main methods were providing a three-hour permit turnarounds for companies in industrial parks with investments totaling over Rp 100 billion (US$6.9 million) or employing over 1,000 workers, or simplifying permits in the forestry sectors to benefit miners, geothermal investors and forestry firms. It also incentivized exporters to park their funds in local banks with more attractive deposit rates and freed some manufacturers in the transportation industry, including spare parts, from the value added tax (VAT).
The objective of the two reform packages was the same: cut red tape, boost investment and stabilize the rupiah. In broader terms, as Cabinet Secretary Pramono Anung put it, they were 'a signal to the people and to neighboring countries that Indonesia is a country that is friendly to investors'.
New investors could potentially inject billions of dollars into the economy and generate millions of new jobs that could in turn boost people's purchasing power and help stoke domestic consumption, so far the locomotive of the economy. But how much longer can we wait for the trickle-down effect from expected investments to revive the economy at a time when growth has slumped to six-year lows for the past few quarters, the rupiah has hit levels unseen since the 1997-1998 Asian financial crisis and the strongest El Niño effect since the 1990s is threatening food crops and prices?
The rupiah, now around Rp 14,700 to the US dollar, is the worst performing currency in the region after the Malaysian ringgit. Economic growth declined to 4.67 percent in the second quarter from 4.7 percent in the first quarter and 5 percent in the fourth quarter of 2014 ' all the lowest levels since 2009. Meanwhile, a prolonged drought caused by the strongest El Niño in nearly two decades has hit crops, from rice to coffee, further pressuring the lives of farmers and prices for consumers.
In the stock market, the benchmark Jakarta Composite Index (JCI) has been among the worst performing indexes in the region, with a nearly 20 percent slump so far this year as foreign investors have sold off a net Rp 13 trillion worth of stocks from the start of the year to recently.
It may seem as though President Joko 'Jokowi' Widodo's administration is doing a lot, with dozens, perhaps even more than 100 policies drafted, revised and introduced. And it did have done a lot, except that all their measures may take a long time to produce concrete results at a time when we need a quick fix to, at least, reverse the air of pessimism in society, business and the stock market. While the first and second policy packages serve the supply side of the economy, we need the demand side to be fixed as well.
Indonesia's economy is 55 percent driven by domestic consumption, but recent consumption indicators have not helped boost the outlook of the economy. Private consumption grew 4.99 percent in the second quarter this year, its slowest since 2011. Sales in cement, automotive goods and motorcycles ' the key indicators for domestic consumption ' improved in August.
The latest Bank Indonesia (BI) consumer survey in September showed that consumer confidence was at 97.5, its lowest level in five years, where below 100 indicates pessimism and above it, optimism.
The weakness in consumer sentiment is backed by people's expectations that prices will continue to increase in the next three months especially in raw food materials, food items, beverages, tobacco and cigarettes. Meanwhile, survey respondents also estimate an increase in their savings over the next six months, indicating their intention not to spend.
Another BI survey suggests that retail sales continued to suffer as indicated by BI's real sales index in July showing decreasing sales of food, beverages and tobacco. In Jakarta, where the middle class is flourishing, retail sales contracted 39.2 percent year-on-year in July. This data is aligned with nationwide deflation in September that was largely due to a drop in the prices of food and beverages, telecommunications and transportation.
With the above identified problems, the government should help revive domestic consumption with three strategies that focus on the grassroots economy, especially low-income sections of society.
Firstly, direct cash transfers (BLT), a system many countries have implemented and Indonesia is very familiar with. BLTs are a quick fix solution that prevent purchasing power from deteriorating. That is especially true as people with low incomes have a high consumption to income ratio ' they are more likely to spend what they earn. Cash transfers can be just that, spending money, or vouchers for purchasing staple foods and other items with the potential to get the real sector moving.
Second, as brought up recently by President Jokowi, is lowering fuel prices temporarily, hence minimizing pressures on fuel costs for both consumers and producers.
While this may mean that Pertamina suffers more losses as they 'subsidize' the gap between market price and actual sales price, the government has pledged to allocate a state capital injection (PMN) for the state-owned oil giant to minimize potential losses. This would serve as a temporary subsidy for fuel that would be lifted once the economy was back to normal.
Third, making the active monitoring of food distribution and stocks a top priority. While the first economic policy package included some measures to help those on low-incomes ' including the speedier disbursement of village funds for cash-for-work programs, more distribution of subsidized rice and fuel converter kits for fishermen to decrease costs ' monitoring implementation, and the sustainability of it, is a far more important thing.
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The writer is a staff writer at The Jakarta Post with an MSc in public policy from University College London (UCL).
