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Jakarta Post

Jokowi administration needs coherent policies

Umar Juoro
Jakarta   ●   Mon, June 8, 2015

The Joko '€œJokowi'€ Widodo administration started last October with very high expectations that it would immediately reinvigorate economic growth, but regrettably the key economic indicators over the past few months were rather negative.

The administration did start with a bold policy to cut fuel subsidies and allocate the savings to massive infrastructure spending.

The 2015 budget revision was approved in February, much earlier than the typical budget revision in the middle of the year.

Inflation, which was high after the fuel-price increase in November, was brought under control.

Economic growth in the first quarter (year-on-year) fell to 4.7 percent, the lowest since 2008, due to the persistent decline in commodity prices that weakened the purchasing power of households.

Investment growth also declined along with the worsening uncertainty about the global economy.

Lately, the government has become more realistic, lowering expected growth to 5.4 percent after the disappointing growth of only 4.7 percent in the first quarter.

Even Bank Indonesia projected lower growth, ranging from 5 to 5.4 percent. Multilateral agencies and many analysts even foresee Indonesia'€™s growth this year at only 5 percent.

Moreover, as the current account deficit is still high, around 3 percent of gross domestic product (GDP), the rupiah has been depreciating.

In the first five months of the year, the rupiah has weakened against the dollar by 6.5 percent.

We can see how the economic policies are conflicting with each other and a lack of coordination affects policy implementation.

On one side, the government would like to aim for higher growth, but on the other hand the government itself held back the efforts.

Meanwhile, the targets in various sectors are too high to be achieved. There should be a serious effort to aim for policy coherence.

The priority should be the economy, then the budget and tax revenue. The economy needs stimulus. If there is a wider deficit because of a shortfall in tax revenues, Indonesia can still get loans from multilateral organizations, such as the World Bank and Asian Development Bank (ADB).

The experience in 2008, when policymakers faced the impact of the global financial crisis, showed it was better to stimulate the economy by putting money in the hands of businesses by giving them tax incentives.

Taking money out of businesses, through additional taxes, customs and levies, and into the hands of the government is not that effective to support economic growth, because of the inadequate institutional capacity of the ministries and regional administrations to implement their budgets.

As President, Jokowi has kept repeating that there is only one vision of the government which is the vision of the President; the top-down target has become unrealistic.

The ministers have simply parroted the high targets set by the President, instead of trying to argue for more realistic targets.

For example, the unrealistic targets to increase power generation capacity by 35,000 megawatts within the next five years and tax revenues by Rp 400 trillion this year will not be achieved.

In addition, because the President also judged the performance of his Cabinet ministers by the amount of mass media coverage they garnered, the ministers tend to focus on issues that are likely to get publicity, instead of addressing the real issues.

This distracts from good policies being implemented.

The government should go back to basics with policies that lead to achieving realistic targets and coordinated policies, and rely on those who can get things done.

The Rp 290 trillion investment budget for infrastructure should be implemented in infrastructure projects that are ready for construction.

Setting the right priorities is important because it is likely that the tax revenue target would not be achieved and the fiscal space from the fuel subsidy cut would not be as large as planned.

This means capital expenditure would be lower than originally allocated.

Faster implementation of infrastructure projects would stimulate related industries such as cement, steel and heavy equipment.

Bank Indonesia should relax LTV (loan-to-value) ratio by lowering down payments for housing and auto loans from 30 percent to 20 percent. This would encourage demand for credits.

The government should manage its '€œnationalist'€ rhetoric and be friendlier to foreign investment. Unlike in politics in which the usual rule of the game is a sum of zero, in economic and business relationships it can be a win-win situation.

The current nationalistic rhetoric is actually a lose-lose proposition, by pushing away foreigners at the cost of new investment and business expansion.

Recently the issue of a Cabinet reshuffle has been gaining strength though the Cabinet is only about seven months old, but changes in several economic portfolios could improve Cabinet performance.

Politically, it is the time for President Jokowi to bring other political parties into the ruling coalition, especially the Golkar Party, to strengthen the political coalition and to offset '€œinside opposition'€ of the Indonesian Democratic Party of Struggle (PDI-P).

Jokowi should show that he is in charge and not be overshadowed by other political figures.

The writer is senior fellow of the Center for Information and Development Studies (CIDES) and the Habibie Center.